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Dr Chan: 2 Ways to Analyse the Stock Market
Aspire, Thought Leaders | 30 October 2015
By: Chen Xushuang
Articles (26) Profile

Many investors are concerned over the timing and magnitude of the much anticipated US Federal Reserve rate hike,  as well as economic figures of superpowers like the US and China. These, however, are not the main issues that renowned author and investment guru Dr Chan Yan Chong focused on in the recently concluded Shares Investment Conference.

“I am not an economics or finance major. My actual field of training is in Mathematics,” he said. But he has recommended two methods of technical analysis that he found to be highly accurate.

1. “Chan’s Channel” and 2&19-Day Moving Averages

The “Chan’s Channel” is a tool founded by Dr Chan himself, which uses five equilibrium lines as a reference to capture large trends.

Source: allanlin998.blogspot.com

From top to bottom, the lines indicate: 95 percent optimistic, 75 percent optimistic, hold, 75 percent pessimistic and 95 percent pessimistic respectively.  When stock figures reach the 95 percent optimistic line, the market is considered to have entered a frenzied state, and investors should sell off immediately. At the 75 percent optimistic line, investors should prepare for a sell-off. On the other hand, they can prepare to enter the market when figures reach the 75 percent pessimistic line. And at the 95 percent pessimistic line, stock prices have reached their lowest, thus presenting excellent buying opportunities.

According to Dr Chan, this tool has helped to accurately capture the stock peak in 2007, the low in 2008, as well as the uptrend of China A-Shares in 2014.

For investors who are too impatient to observe a long-term trend, this is where the moving averages come in. Dr Chan recommends using the two-day and 19-day moving average, as he finds these two to be the most effective after years of experimentation.

Basically, a sign for investors to buy is when the two-day moving average rises above the 19-day average, and when the former falls below the latter, it is a sign to sell. The reason behind choosing the two-day instead of the one-day moving average, as explained by Dr Chan, is that there might sometimes be false news in the market that leads to sudden volatility, thus an additional day is needed for things to settle down. Similarly, he chose the 19-day instead of the 20-day moving average (which he finds most people using) as he finds that it gives him the advantage of selling one day earlier and making more profits.

“Technical analysis is a combination of statistics and psychology,” said Dr Chan. “I might have to experiment again when most people actually start using the two-day and 19-day moving average.”

2. Cause-and-effect Analysis

Unlike technical analysis, the cause-and-effect analysis looks into external factors. Dr Chan recalled that the share price of Cathay Pacific Airways had halved after the 911 incident in 2001, and he had seen that as a buying opportunity.

Price of Singapore Airlines (blue) and Cathay Pacific (black). Source: http://www.terraseeds.com/

“The fear towards travelling by plane is only short-term, maybe lasting only up to three months. After which, people will likely get over their fears and start travelling again. I recommended Cathay Pacific instead of an American airline, also because of lower chances of it facing terrorist attacks,” said Dr Chan.

2016 Outlook

Dr Chan sees an inevitable burst of the stock market bubble, and tells investors not to expect speedy recovery. Though he acknowledged that China’s middle class is rising and that China’s economy seeks to become more consumer-driven, he warns about the possibility of an “IT bubble” in future, as e-commerce giants such as Alibaba and Tencent might turn out to be overvalued. Thus he reminds investors who wish to “play in the bubble” to watch their charts closely and “be ready to back out at any time”.

As a Communications Studies graduate specialising in journalism, Xushuang is keen to observe and explore issues that readers want to know more about, and to deliver quality content through engaging writing.

Please click here for more information about this author.


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