My Favourite Counter

Click on the image to enlarge

Ok so now let me introduce you the tool that I and most analyst used to analyse the movement of stock price. I'm using a charting software from ChartNexus. Even for most professional, this is a powerful charting software. And it's free!! Well, there are couple of features where you need to pay if you want to use them, but almost all that you need to do your analysis are free. Your stock broker may also provide you with their own charting software. RHB Invest and Jupiter used NextView. I don't know about others.

In the chart shown above, I've used several indicators to help me making the right decision. There are Moving Average (MA), Stochastic Oscillator, Moving Average Convergence Divergence (MACD), Volumes, Japanese Candlestick, and Bollinger Band. I'll try to break them into single item in the next couple of posts. In the meanwhile, I would like to give you a very brief information on how do I analyze this counter, and how I made my decision on when to buy and sell.

As I said in my previous post, I'm pretty much a 'rojak'. I looked at the fundamental of the companies when choosing which counter I would like to trade. I listed down each counter with the fundamentals that meeting my criteria, for easy reference. That way, I don't have to waste my time looking for good counter each time I want to trade. I only trade the counters in my list, and E&O is one of the counter in my list. I won't bother disclosing this company's financial report, as you can find it easily on the Internet. Just go to Google Finance and type 'eastern oriental' in the search box.

Well anyway, I've been monitoring this stock for couple of days before I bought it. Let me first introduce you to two indicators in the chart. One is called Moving Average Convergence Divergence (MACD). This is the one with green and red histograms, and a blue and red line, where sometime these lines will overlay the histograms. There is 'MACD (26d, 12d)' and 'Signal (9)' written at the top left of this indicator. The rule is, buy when the blue line is crossing above the red line. But, most of the time, if you're based your decision solely on this indicator, you will lose money. Trust me, because I've lost few times already when using this indicator by itself.

But the main reason I bought it was because the stock price has been in the range of 0.40-0.44 for couple of days, following the downtrend from the high of 0.80. The price did not went down any further than 0.40. One plausible explanation is that while the sellers were selling their holding, someone was buying. Yes I know, with every selling, someone must be buying. During the downtrend, the sellers will offer the price that he/she willing to take for him/her to sell his stocks. If no one want it at the price quoted, maybe because the price is still high, or there are another sellers offering lower prices, he/she has to lower it price too. The result is, the price will go lower, and lower, until someone find it attractive to get the stocks at the quoted price. Hence the downtrend. But when the price reached the range of 0.40-0.44, someone was buying at whatever price quoted at between that range. When the price reached 0.40, that 'person (or maybe persons)' bought as many as he can, thus cutting the supply and stopping the price from going down further. When other sellers saw this, they'll increase their price, until it reach 0.44. At this price, the 'person' 's bought less of this counter. When the demand is less, sellers will decrease their price again, thus explain why the price were trading between 0.40-0.44. The date at which the price was trading within this range is from 4/12/2008 to 31/12/2008.

At the start of the rally (indicated by the first white candle after the range trading), the volume surged to a very high level, relative to the volumes for the past couple of days. The date was 31/12/2008. Someone was buying, and he/she was buying a large amount of this stock. This dried up the supply of this counter for that day, which allow the price to close higher compare to the previous day. One of a very strong signal of market strength is that the volume suddenly jumps, and there is a white candle with wide body, especially after a downtrend, or after the stock trading in a small price range.

And as the chart shows, the stock really did went up, until it reached a high at around 0.80, which is almost similar to the previous high. Oh and did you noticed the white candle with the widest body, with the volume almost similar to the volume when the rally started? The date for that day is 9/1/2009, and this is when there was a headline in business section of The Star saying that Goldman Sachs has acquired 10 millions of E&O shares. And this is the day where the price shoot up the most, in terms of percentage. This is the day where you'll find retail investors buying this counter. Lots of them will come out and start bidding, thus shooting up the price. Most of them are investors who buy on a good news from newspaper, without doing their homework. They bought because they don't want to miss out the ride. If you want to be professional, or at least making more money than the crowds, you must not follow the herds. Follow where the professional money goes, not the crowds.

The next day volume was even higher. There are still lots of buying activity, and the price reached the high of 0.80, similar to the previous high. But, when the trading session is closed, the price did not close at the high. This is the sign of weakness, but not a strong sign, because the body of white candle is still wide. Nevertheless, professional money will pay close attention to this sign. To confirm the market is overheated, I turned into my stochastic indicator (the one below MACD). The region above 80% is an overbought region, and the region below 20% is and oversold region. When all the lines are in the overbought region, consider selling your stock, and vice versa. Look out for crossover for the timing. Sell your stock when the black dotted line (called %K) crosses below the red or blue line in the overbought region.

As expected, the price went down the following day, and there is black candle registered on the chart. I managed to sell my stock at somewhere near the peak. How do I managed to sell at the right spot? Well, I have another powerful tool in my arsenal. Did you see the blue horizontal lines in my chart? The one with weird percentage numbers? That is called Fibonacci retracement, and it serves me as my support and resistance. Each line will either act as a support, or a resistance. Whenever the price reaches the line, it has the tendency to retrace, or in other word, to move to the opposite direction.

So how much profit would you get if you happen to trade like what I mentioned above? If you managed to bought it at 0.40-0.44, and sell near the peak, that's roughly about 80%-90% profits, in only 3 weeks!! Imagine if you bought RM10,000 worth of shares at price 0.40-0.44, that's RM9000-9500 in profit, and after the comission, you will end up with RM8900-9400 profit. That's more than 2 months salary of most fresh graduate. And the good thing is you don't have to pay tax on your gain! How wonderful is that? Well of course there are risks involve, but as long as you manage those risks WELL, the benefits definitely outweight the costs. I've loss couple of times too, and there is one time where I loss almost RM1000 in just a week. But I've learned from my mistake, and improve myself by seeking more knowledge. So the key here is knowledge. Knowledge of money management, risk management, and reading charts. Once you mastered them, you will have more winning streak.

That's all for today. If you want to learn about chart, such as what is candlestick, MACD, Stochastic, and etc., you can visit StockCharts.com. I relied on this website the most when I started to learn how to read chart.

Ciao

p/s: I just realised that I said this is supposedly a 'very brief' explanation. I guess it's not so brief anymore! haha..... :P