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Finding Opportunities Through Warrants With Daryl Guppy
In the Spotlight | 21 October 2011
By: Xavier Lim
Articles (51) Profile

The recent stock market turmoil led to a fierce debate among traders and investors as to whether the stock market is in a bear market, or just a correction.

Daryl Guppy, known as “The Chart Man”, shares with us his views on the current stock market situation and how investors and traders can find opportunities from this choppy market through an exclusive interview with Shares Investment (Singapore).

Daryl who invented Guppy Multiple Moving Averages (GMMA), which is included in the MetaStock and some other charting programs, is an equity and derivatives trader and author of books on stock market trading techniques.

Shares Investment: The recent market sell-off has led many experts to advice investors to stay away from the stock market. What is your view on this?

Daryl Guppy: Investors find the modern market very difficult because trends are shorter, more unstable, and less sustainable. This is not a market where you can buy and forget. It requires active management.

Traders enjoy this market because there are many opportunities to trade. They can trade from the long side and from the short side. The growth of derivatives markets makes it easier to generate good returns even from smaller price moves.

Investors will need to develop new thinking to survive because the volatility we see in modern markets is not going to disappear. Volatility is here to stay, hence, the challenge for investors and their advisors would be on managing that volatility. Unless investors are able to develop a mature understanding of risk imagined, then I would agree that they should stay away from this market.

Do you think that Portugal, Ireland, Italy, Greece and Spain will likely come through their debt problems, just as Latin America, Russia and Asia did in the 1980s and 1990s?

The PIIGS will come through their debt problems but at this time it is difficult to see how the solution will develop exactly. It is important to remember the scale of this problem and put it into proportion. California, for instance, has a larger debt than Greece. California has laid off public servants, stopped paying into pension funds and taken other measures to, so far unsuccessfully, reign in debt.

In the EURO zone, the debt to GDP ratio is less than the US debt to GDP ratio. In 2008 public debt was shifted to sovereign debt. This is now a problem much larger than just the PIIGS.

Since the beginning of the year, the Straits Times Index (STI) and Hang Seng Index (HSI) have fallen by more than 15% and 20% respectively. What is your recommendation for investors?

The fall in the STI was part of a long term rounding top pattern. Investors had several months to recognise this pattern and take appropriate action. The downside target for the pattern was near 2600 which is also a long term historical support level. Now it’s important to watch for the development of consolidation activity. This creates the conditions for a rebound and the potential to retest the 3000 resistance level.

The Hang Seng is all about support, resistance and trading bands. The central reference trading band is between 21000 and 23000. The breakout above this trading band has a target near 25000. This is calculated by measuring the width of the trading band and projecting this upwards. The 25000 target was achieved.

The same method is used to set the downside targets. First, downside support is near 19000. This is a historical support level. Next support is near 17000 but this is relatively weak. A fall below this level has stronger support near 15000. This was the peak of the W shaped recovery in 2008.

Could you share with us what are some of the critical resistance and support levels for STI and HSI?

There is strong resistance near 3200 so any rise in the STI has limited upside. This rise can be maximized by trading derivatives. Failure of consolidation support near 2600 has a downside target near 2300. This is a weak support level so traders would be ready to keep short positions open.

As for HSI, a rebound from current levels has strong resistance near 19000. A move above this has substantial resistance near 21000. There is a need to develop a period of consolidation activity before a new uptrend can develop. Consolidation consists of rally and retreat behavior between the historical support and resistance levels.

In the past few weeks, we have witnessed choppy markets, where volatility is very important to equity and derivatives traders alike. What is your advice to those who are looking to trade warrants?

Warrants are ideal trading instruments in these market conditions because they allow traders to easily go long or short. Warrants are not available over every stock, so it helps to focus attention. Traders can specialise in the behavior of one or two stocks, and concentrate on trading their associated warrants as effectively as possible. The various warrant series gives them a choice about how much leverage they want. The leverage in derivatives means that a relatively small move on the mother stock translates into a much larger return from the warrant.

In volatile markets traders must be ready to act quickly to open a position, and also need to act quickly to take profits or cut losses. This is short term trading where timing the market is a significant risk factor.

Top Macquarie Warrants Weekly Gainers

Source: Sources:Bloomberg, Macquarie. Prices used to calculate weekly % changes are as of 10 Oct 11 and 17 Oct 11.

*Please note the following BEFORE trading: -
1. The above-mentioned Warrants will expire at 12.00 noon (Singapore Time), Friday, 28 Oct 2011.
2. Trading of the Warrants will cease in the “Ready” and “Unit-Share” markets with effect from 9.00 a.m.,
Friday, 21 Oct 2011. Trading will continue in the “Buying-In” market up to Friday, 28 Oct 2011.
3. The Warrants will be delisted from the Official List of SGX-ST with effect from 9.00 a.m., Monday, 31
Oct 2011.

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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