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Learning From The Guru Of Technical Analysis
In the Spotlight | 09 April 2010
By: Xavier Lim
Articles (51) Profile

Fundamentalists believe that once they have invested in value companies, the broad market movement will not bother them, however, seeing their life savings crumble in the 2007-2008 punishing market is definitely discouraging. Trend-following traders, on the other hand, are able to strip out these emotions because the change in the trend will trigger a sale early in the cycle. They are able to use technical analysis techniques to figure out the best time to enter into an undervalued security. Often, this situation occurs when the security is severely oversold. By timing entry into a security, the gains on the investment can be greatly improved.

Daryl Guppy who appears regularly on CNBC Asia and is known as “The Chart Man”, is an equity and derivatives trader and author of books including “Share Trading”, “Market Trading Tactics”, “Snapshot Trading”, “Better Stock Trading”, “Trend Trading and The 36 Strategies of The Chinese For Financial Traders”. Daryl is also a contributor for financial magazines and media.

Daryl will be speaking at the Asia Trader & Investor Convention (ATIC) at Suntec Singapore, from 24 – 25 April 2010. Through an exclusive interview via email, Daryl shares with us his views on the current economic situation and some of his trading strategies.

Should we try to get a head start on those who are planning to “sell in May and go away?”

“Sell in May and go away” has its origins in the relaxed work of British stock broking in the 19th century. A quick look at the historical charts in the last 20 years shows this is a great way to hand profits to somebody else. Those who went away in May 2009 missed out on around 59% profits by the end of the year. It’s dangerous to rely on simplified myths in the market because markets have changed substantially in the last 20 years. They have also changed significantly in the last 2 years as a result of the Global Financial Crisis (GFC). The validity of every myth should be verified against the reality of the market.

According to the standard definition, a key reversal day occurs when the market hits a new intraday high and then closes down. This was what the Dow Jones Industrial Average did on Thursday, 25 Mar-10. However, the index continued to trend upwards. What is your view on this?

Markets have changed in the 21st century. It’s a result of increased participation, increased speed of trade execution and increases in the flow and availability of information. In the last decade we have seen the rise of ETF funds, of indexing portfolio management, of “dark pools’ and complex derivatives. Many of the ‘standard definitions’ were developed 60 to 80 years ago, well before these new developments and trading instruments. A large number of the standard definitions have withstood the test of time, but quite a number have failed this test.

This doesn’t mean we throw them all out and start from the beginning again. It does mean we assess these standard definitions against the recent behavior of markets. The failure of key reversal days was a common feature of markets in 2006 and 2007 so there is no reason why this standard definition would suddenly become more accurate in 2010.

Markets change and the challenge is to adapt existing tools to new conditions rather than keep on using the same tools in the same old ways.

In view of the global economic recovery and stock prices trending up from their lows, what is your recommendation for investors?

The key difference in the post-GFC market is the lack of trend sustainability and the volatility of trends. The investment methods used before the GFC are not longer as appropriate and in many cases will fail or deliver false exit signals. Managing the new trend behavior is the most difficult task on 2010 and into the near term future.

Trend sustainability is the ability of a stock to keep moving relatively steadily in the same direction for many weeks or months. Stocks have developed shorter term trends followed by substantially rapid trend corrections. This is trend volatility. Prices drop rapidly, triggering many exit signals, and then rebound just as rapidly. Managing risk effectively in this environment has new challenges. Our solution is to focus on understanding trend behavior rather than price behavior.

The GFC has shown that global diversity is a more important way of managing risk. The growth of Exchange Traded Funds has given us a way to manage global diversity. It also gives us a way to reduce specific stock risk.

The most important recommendation is that a stable portfolio will now need to include derivatives, such as ETFs, and other instruments to help manage and hedge risk. This will require more active investment management that was used before the GFC.

Based on your experience and opinion, will there be any corrections within these few months for the Straits Times Index?

We are likely to see more rapid and severe correction in trending behavior in the STI. This is a feature of the changed volatility in markets. The speed of the 2010 January-February pullback and reversal is an example of this volatility. Markets have been trapped in a sideways trading band. A successful breakout above this sideways band has an upside target above 3,600. Any major retreat has good support in the trading band area around 2,700 to 3,000. The defining feature of the market is not trending behavior, but trend volatility.

In your view, do you expect the Straits Times Index to hit the 3,300 mark in 2010? Why?

We have upside targets near 3600 for the Straits Times Index. There is a high probability of reaching 3,300 in 2010. The slowing trend momentum indicates a more sustainable trend rise. The current chart behavior shows good support from long term investors. We use the Guppy Multiple Moving Average indicator for this analysis. The successful retest of this support following the January-February retreat provides evidence of trend sustainability. However the trend rise towards 3,300 and beyond is unlikely to be smooth. Trend volatility remains high.

Which direction will global equities be heading towards in the 2nd half of 2010? Which markets do you prefer?

I remain bullish for 2010, but with a decreased rate of upwards momentum. The fast raise from March 2009 to October 2009 is less likely to be repeated. The biggest returns always come from a low base but sustained returns come from a more stable trend.

My preferred market is China because this is the driving force behind world recovery. Markets, and stocks, which are orientated towards the China recovery are of particular interest. The growth of ETFs provides a convenient way to trade market behavior without the need to select individual stocks.

We use a hybrid-portfolio structure. This uses ETFs as the foundation of market and global market exposure. We trade individual home market stoics on short term trends to add value to the foundation portfolio. The US market offers opportunity that is most easily accessed through ETFs used as trading instruments.

Despite my general bullishness, there lurks in the background the realignment between fiscal and asset values that must occur in the US. This adds a note of caution to all market exposure. When giants fight – the US and China – then others get crushed.

What is your advice to those who want to become a successful trader?

Learn from the mistakes of others. You do not have enough money to be able to make all these mistakes yourself. Other traders have been generous enough to share their experiences, their skills and their losses in books and articles. There are many different methods and it will take time to decide which methods, or combination of methods you are most comfortable with. Examine those methods which have been tested in the fire of general public criticism. The content in a book published by John Wiley has been assessed by trading professionals in the industry so you know the ideas are sound.

The ideas in a book published only on the internet, or available only if you sign up to a course, have not been independently tested. Without the transparency of public criticism there is more room for deception.

Get a good charting and data package, such as NextView or Metastock, or GuppyTraders Essentials and learn how to understand the information created by chart and technical analysis.

Understand money management and its relationship with risk control. Every trade is a potential disaster waiting for you to make it happen. Money management is the essential basic of risk control.

Understand the strategy of the market before you take a trade. The relationship between strategy and trading is discussed in The 36 Strategies of the Chinese For Financial Traders. Every trade takes place in a market context. Understand the context – the strategy – and you can select the right tactics and use the right tools to develop a successful trade for the current market conditions.

My single piece of advice to new traders and to traders with experience is just one word. The word is humility.

Humility means you understand that other people in the market know much more than you know.

Humility means you appreciate their knowledge and you learn to follow their conclusions in the market.

Humility means listening to the chart and when you listen you can hear money talking.

Does technical analysis work all the time for you?

I find technical analysis the most objective and reliable method of understanding market behavior. As an analysis method it works consistently. There are always individual stocks where technical analysis does not provide a reliable analysis method. I do not apply technical analysis to those stocks.

Technical analysis is effective because the behavior of price is a direct result of the behavior of individuals. I use technical analysis to understand the behavior of the market, the psychology of the market. When I can understand how others are thinking then I can make better decisions about the location and nature of opportunity in the market. I assume that everybody in the market knows more than I do, so I listen to what they have to tell me. The analysis of chart patterns, price behavior and selected technical tools provides me with a trading advantage. Technical analysis gets me into the right position, but its trading skill and risk management that extracts a successful trade.

Armed with an arsenal of investment knowledge, Xavier is the Senior Research Editor at Shares Investment.

Please click here for more information about this author.


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