MEGa Decline Near Support Level

Here's another practice lesson on drawing trendlines. I'll be using MEG because the decline last week is really described as mega, as in super. It's as if its rushing to touch the support line which is drawn by connecting the low of Oct 1, 1998 and the low of May 30, 2003 then project the line to the right. Yes, we are now at the 10yrs support line, the first 2 points have 5years in between. Five years later from 2003 , we are seeing a retest of that support line. For Oct 20, 2008, the line is at 0.90. A bounce at that point could be a buy signal. A breakdown could send the price to test the horizontal support at 0.82

Let PAX decide

I am often asked how do I draw the lines. For one to determine the risk and the reward of a certain stock, he/she must first know how to draw the resistance (reward) and support (risk) lines.

Two basic rules to remember in drawing the lines:
1) Resistance line connects the highs
2) Support line connects the lows

To show some illustration, I'll be using PAX chart for our study. In our chart, I draw the topmost resistance line by connecting the high of April 18, 2007 and June 15, 2007 (see red arrow1 and red arrow 2) and extend it to the right. Notice that the resistance line had held down the price last June 25, 2007 when it tried to rally. It's a clue that the resistance line is so strong that after failing to break the resistance line, prices had plummetted to a low of 2.95 in February 14, 2008 and keeps holding it down till yesterday's trading.

Let's now draw our support line. Let's connect the low of April 28, 2008 and August 22, 2008 (green arrow 1 and green arrow 2) and extend it to the right.

Now here's something exciting on PAX. Notice that price will be crossing the resistance line. My estimate is in 12-14 trading days (just estimating the spaces of the candlesticks). What will PAX do? At the point of crossing, Let PAX decide.

All Gaps are COATed

A nice example of the so called Continuation Gap. It appears halfway through the move thus it is also known as Measuring Gap. The Continuation gap is shown here as Gap2 and Gap3 (notice that opening of Gap3 is halfway the peak of the run-up). Prices will first peak, reverse and filled the Continuation gaps in time then trend up again (the continuation of the uptrend). Gap 3 was filled last July 16 while Gap2 was filled last Aug 1. That completes the whole cycle of the Continuation Gap thus the stock now is ready to continue its uptrend.

Gap1 and Gap4 are gaps that can be identified as an Island Reversal. This name was gotten from the appearance of the cluster of candlesticks that appears to be a separate island.

Two bullish signs you got there and hopefully you have learned two lessons as well for today. P2.50-2.60 might pose some resistance so consider these as your initial reward. Soon as these prices are taken out, look at 130MA which is currently at P2.78 as your next reward. Risk corresponding to support is currently at P2.40. Your assignment: compute for your risk reward ratio. Is the reward worth the risk?

LIHC - Fast and Furious

Wanna ride LIHC? Buckle your seatbelt for the angle of inclination is so steep.

The inset box show the full chart since Nov 2007. LIHC is moving in a descending channel and got out last April 2008. Let's now zoom in on the short term trend after that. It consolidates inside an ascending triangle and breakout last June 3, 2008 then corrected the next day. Since this is already in the watchlist of many, when the price bounced at the support line, it is a clue to ride the train again.

For June 10, 2008 trading, support is at 8.80 (9.30 for June 11). Some levels of resistances to look at are 9.80, 10.25 and 10.75. If all those will be taken out, the next resistances are 13.25 then 16.25.

SINO?

My Pick? SINO? It's a breakout at 0.28 both on the downward line from Oct 2007 and on the upward line from Dec 2006. There's a resistance at 0.30 but major resistance is at 0.36. If 0.36 will be taken out, price action could probably lead us to 0.50. Compute risk at support which is 0.28 and reward at 0.36.

SMC - SwimMing against the Current

With the downstream Phisix, the search is on for those stocks that is swimming against the current. Scanning the technical signals of the index stocks, two stocks catches my attention - SMC and URC.

Let me first feature the chart of SMC. This stock broke free from the downtrendline formed by connecting the highs of July 16 and Oct 2, 2007 but its rise was halted at 46.5. It corrected after that but the decline found support at 42.50.

In entering this stock, compute your risk at line 1 (the level on Monday, April 28, 2008 is 43.63). I would temporarily place reward at 46.5 (its high last Mar 31, 2008). Place stop right below line1. If SMC will break 46.5 adjust trailing stop to 46.5. Pls see the sidebar to see daily updates of Line 1 and trailing stop.

Bounce or Drop for Phisix?

Phisix did not follow DOW movement today. Let us see its movement to see the risk and reward of getting into position.

Looking at its short term trendline, P6 had broke out from the downward line formed connecting Jan 2 and Jan 15, 2008 high. Although it's above the downward line, it slides down with the line. A resistance line was formed by connecting Feb 5 and Mar 6, 2008 high. Let's call this line 2. On Apr 2, 2008, P6 broke out from line 2 and this line change it's role from resistance to support. Since the support that is catching P6 is downward bias, the index slides down with the support.

A new resistance line was formed by connecting Dec 7, 2007 and Apr 3, 2008 high. We call this line 1. Please note that line 1 is perfectly parallel to line 2. Line 1 (which is crossing today at 2949) crossed today the horizontal resistance (2957) thus giving double resistance to Phisix.

Closing at 2890 today, P6 is sitting exactly at the horizontal support (2890). It will be exciting to watch what will Phisix do tommorrow. Will it bounce or will it drop? If it bounce, you can estimate your reward up to line 1. If it drops, you're risk is at line 2. Pls check the sidebar to see where the lines will be crossing tommorrow. Will regularly update this until we formed another important line to monitor.

DOW Reversal?

More than the close, I am observing the high. If you are monitoring the level where the lines will crossed at the sidebar, the high for April18, 2008 (12,893.98) have touched the major downtrendline (for April 18, line 2 = 12,895). Another major observation, line 1 which is the short term uptrend line (for April 18, it is at 12,763.42) is crossing the horizontal resistance at 12,768.

Although the high did not break line 2, telltale signs shows that there's already an attempt for a reversal. When it failed to break out from that line, it heads back down but closed above line 1 (which is also the horizontal resistance level for the day).

What can we speculate on the direction of DOW for Monday? I'm seeing two probable scenarios: It will move inside Line 1 and Line 2 area or it will break Line 2. Watch out for the update of the lines on Monday.

You will still see updates of line 3 and line 4 (reference chart click here) but at the moment, these lines are irrelevant.

Betting on LOTO

This was a long delayed answer to Pat's request. Good news and bad news!

The good news first. 1) The price break free from the downward price channel. The resistance line of the price channel is now serving as our support. 2) The price also breaks the ceiling of the box that has been holding it in condolidation inside the price channel (ceiling is at P10.00). For the bad news, I know you'll see it very obvious. 1) The price went back inside the consolidation box. 2) The previous resistance of the price channel serving as support is in downward bias so the support is dropping.

Checking previous price movements (see blue circle), we can see that a box was formed middle of Aug 2007 and price broke out from the box on the last week of September only to be stopped at the resistance of the price channel. After that, it heads back down.

This time could be different since LOTO is outside the price channel. The most probable scenarios that could happen are 1) Price will head back down and bounce at the price channel line serving as support (this bounce on the line will confirm the strength of the support line. If the line will cross the floor of the box, it is the floor that will be tested first (floor is at P9.00). 2) It will head back up the ceiling and continue forming a new box with a probable resistance at P11.00

PAXful of caution

50MA crossed back down 32MA.

The 32MA had formed a flat line for about 3 weeks which could have meant that the price could already be consolidating. PAX attempted to break free from the consolidation last April 4, 2008 but failed. After that, the 32MA have exhibited a downward slope which should caution PAX trader that the price could revisit the recovery line (Line 1) which will be crossing April 14, 2008 at 3.30. If line 1 will fail to hold, price is bound to revisit 3.10 or 2.95.

I have added a monitoring on the sidebar of the recovery line (Line 1) so you will know at what level it will cross the day. It is upward bias so it is changing everyday.

TUNA Revisited

Last Thursday, TUNA break from the price channel support (LINE 1). If you are strict in adhering with your risk reward strategy, you have exit your position when the line was broken.

I have revisited TUNA to see where the next support is for that will give me the re-entry level. Although the price is still within the upward channel in the last week of Feb 2008, a consolidation box have started to form already. The box floor is at 1.84 and ceiling is at 2.02. Buying at 1.88 will give you a risk reward ratio of 0.285 (approximately 1:4) which is even below our recommended 0.33.

What if you have not cutloss when the channel support line was broken, is it still recommended to cutloss now? No because the price could be on its way up (taking the queue from the bounce at 1.84 and strong buying at 1.86) and selling at this point will just result to getting whipsawed. I suggest that you just hold and cutloss if the floor of the box is broken.

Take note that 50MA is already kissing the 200MA and is bound to cross over on April 14, 2008 or the next day. After that crossing, I have a feeling that the price will attempt to get back in the price channel and then try to take out the ceiling of the box.

Line 1 which is previously our support has now reversed its role to resistance. It is upward bias thus the level of resistance it gives changes every trading day. To give you guidance on where this line 1 is crossing, I have included a daily update of its level at the sidebar.

DJIA Update April 11, 2008

The short tem uptrend line (line 1 = 12,511.71) is broken with DJIA lowest at 12,302.06. Line 1 is now serving as resistance. Let's see on April 14, 2008 if DJIA will get back on line 1 which will be crossing at 12,553.67 or heads down further. Check the DJIA line update on the sidebar to monitor the levels. We are looking closely on the lowest of the day and not the closing. Line 3 can provide support.

Added Feature On The Sidebar

To let you have an update on where the lines will be crossing for the day, I have added an additional feature on the sidebar. This I call Lines Update. As critical lines need to be watch, I will be posting the exact price the lines will be crossing on a certain date. Charts may be updated too from time to time, so make sure you click on the chart to be able to follow the lines.

Initially, I will be updating DJIA, PAX and TUNA. Hope this feature will help you.

DJIA - Short Term Look

Phisix market sentiments are affected by DJIA so I decided to post here how I see the DJIA movement.

Last March 14, 2008, DJIA is a long black candle closing with -194.65 but there was a smile on my face. Seeing blessing amidst adversity, I made a call that we are on our way to recovery and the possibility that we have already seen the bottom for as long as the line formed by connecting the lows of Jan 22, 2008 and March 22, 2008 (from our chart at the left, that is line 4) is not broken (post at Finance Manila forum Foreign Markets and Dow Futures Watch March 14, 2008). The next trading day, DJIA bounced from that line confirming that it is a valid support. On my notes I call it recovery line because that will bring us to recovery for as long as it holds.

But as prices zoom up fast and far from that line, I become a little cautious because once the DJIA drop, the magnitude might be big considering its distance to line 4. I was delighted to see a higher low formed last March 31, 2008. A steeper line to catch the DJIA was formed by connecting the lows of March 17, 2008 and March 31, 2008 (Line 1).

Today, DJIA closed 12,527.26 (-49.18) but I'm more interested to know the lowest for this will show how strong the support provided by line 1 which is our current short term look. The lowest registered today is 12,468.97 and line 1 crossed today at 12, 427.81. Meaning, our line 1 is still holding. Yipee! DJIA is still uptrend on the short term. Let's see tonight's DJIA if it will bounced from the line or pierced it. Line 1 will be crossing tonight at 12,469.76. This is the level to watch tonight. The low has more stories to tell than the closing.

For Roiking - OPM Looks Fishy

Pat have requested this before but since I saw a bearish chart just like OV, I decided not to post the OPM chart anymore. But with a follow-up request from Roiking, I gave OPM a detailed look.

I have always been fascinated by the box theory of Nicholas Darvas. Tracing back from January 2005, we can see that OPM is in uptrend with boxes forming a pyramid. When all of a sudden, it was disturbed from it's steady rise and zoom up in the first quarter of 2007. It went up, it went down, but despite this volatility, you can still see that there is a box formed whose floor is at .020 and ceiling at .025. The price movement attempted 3X to get out of the box but failed (with each attempt forming lower high but respect the floor of the box).

We also see a symmetrical triangle whose break out can coincide with the box (either floor or ceiling). But I am bearish on this breakout since the 50MA had already crossed below the 200MA (do you see the blue circle that looks like the eye of the fish). Many called this Kiss of Death for it signals a further downturn of the price.

If you still want to buy this stock, you can compute your risk and reward as the floor and the ceiling of the box respectively. The best scenario could be it will just consolidate within the box way beyond the tip of the triangle. The worst: it breaks down from the floor of the box and hit the support line at around 0.016 (or maybe dropped to the next support line at .012)

TUNA update

With reference to our TUNA chart in the previous post "Something's Cooking With Tuna", support of price channel will be crossing tommorrow at 1.90 and resistance of the price channel will be at 2.30. At 1.98, risk is at .08, reward is at .32 and risk reward ratio is 0.27 (.08/.32). At 2pesos, risk reward ratio is still at 1:3 (risk reward ratio at 2pesos is 0.35).

Still a BUY at 2.

PAX update

Refer back to PAX chart in the previous post, the recovery line will be crossing tommorrow at 3.23. PAX at 3.35 is a good buy (that is if you can still buy PAX tommorrow at 3.35). Risk is at 3.35-3.25 (price based on fluctuation) = 0.1, reward is 3.70-3.35 = 0.35 therefore risk reward ratio is 0.28.

PX - Higher Risk Than Reward

PX price last Friday stopped just below line2 resistance (6.65).

In computing for risk reward ratio for PX, we first draw the major resistance line which is the high of Nov 9, 2007 and Mar 4, 2008. We then make three duplicate lines and move it to lower resistance points and gaps. From these 4 perfect parallel lines, we take our supports and resistances. Line 1 resistance is at 7.49 and Line 4 support is at 5.53. Computing for risk reward ratio at 6.60, risk is at 1.07 and reward is at 0.89 therefore risk reward ratio is 1.2 (What?!? A whole number? Our target is only 0.33 and below.) And that is not yet considering "What if it breaks line 4?". That line 5 can bring PX to 4 pesos. If you still want to gamble with PX, buy if line 2 is taken out but be sure to exit fast if this turn south for it might be quick and it might be deep.

With a higher risk than reward, PX is only for the brave and gutsy.

Something's Cooking with Tuna

Tuna made a run up yesterday. The 5MA already crossed the 35MA (1), volume is twice volumeEMA (2), stochastics already signal a BUY (4). The only concern is the MACD (3). For some traders, they will wait for the MACD to signal a BUY too. Without the MACD confirmation, it will be a risky trade.

So if you plan to buy TUNA, compute your risk reward ratio before entering a trade. It closed at 2.00 yesterday. Risk is 2-1.86=0.14 and reward is 2.24-2=0.24. Ratio is 0.14/0.24=0.58. It did not pass the 1:3 (0.33) ratio criteria.

What price will give us 1:3 risk reward ratio? Back computing, we get 1.94 as entry price. Risk of 1.94-1.86=0.08 and reward is 2.24-1.94=0.3. Ratio is 0.08/0.3=0.27 which is even better than 1:3. Risk reward ratio of an entry price of 1.96 is 0.35 which is slightly above 1:3.

Therefore the best entry is at 1.94-1.96. Wait for a retracement at 1.94-1.96 or wait for the MACD to cross and signal a BUY.

Special Request From Pat - OV,OPM,PCOR

Usually the stocks that you'll see here are those that I have in my portfolio (The only stock I have right now is PAX) thus I am monitoring if it will break support line or when it's time to sell. I am also studying some stocks I plan to buy like BRN so I can determine the right entry point.

Let me deviate on this for a while and will give in to Pat's request of featuring OV, OPM and PCOR.
Let me start with PCOR. There is a potential head and shoulder pattern being completed (this is more visible in the weekly chart). The trendline is pointing deep. The 50MA cross down 200MA, DMI is below 20 and MACD is about to cross zero line. If I were you, I will avoid this.

In analyzing stock charts, I usually start with the overall picture of the chart from way back 10 yrs or depending on how far is the available data. I try to assess if the stock I'm looking at is on the upward or downward wave cycle based on Elliott Wave theory. Unfortunately, OV has just finished its upward wave cycle and is on its first leg of the downward cycle. We don't know how low this leg can be. There are some downward cycle that are just shallow and tend to just consolidate/move sideways. How deep or how shallow this next downward cycle will be is something the chart cannot tell. It is only known at hindsight. Also the head and shoulder pattern is potentially completing it's downward leg.

How is OPM related with OV? I see the same pattern with OV and OPM so I decided not to post OPM chart anymore.

Mission Of This Site

I am delighted to know that the few who have already visited this site messaged me that they like this site. Thank you. I'll be more than delighted if many reading this blog will learn how to draw the lines of support and resistance, identify where those support and resistance are, know how to compute for the risk reward ratio and be equipped in deciding when to enter and exit a trade.

Gaps are levels of support and resistance

Aside from the support and resistance lines drawn by connecting the lows or the highs, gaps are also levels of support and resistance. One nice example today is BRN. The gap up at 3.20 last Jan 21, 2008 serves as the resistance on the run up that happen today at BRN. The support was provided by the high of Jan 18, 2008 (3.05). If you intend to enter, wait for a retracement where resistance is 3.05. Support can be provided by the downward line connecting Feb 19, 2008 and March 12, 2008. It would be crossing tommorrow at 2.84. I'm just concerned that the support that will catch you is on a downward bias and will further slide down soon as you enter. Another scenario could be BRN will take out the gap therefore the best entry I guess is after 3.20 is taken out with volume.

Learning to Compute for Risk Reward Ratio

Let us start studying risk reward ratio using PAX data. I have removed the overall picture and just focus on the data from Feb 15, 2008 - March 24, 2008.

In determining the risk reward ratio, I first assess where my support and resistance are. The support line (labeled recovery line 1) is drawn by connecting the low of Feb 15, 2008 (2.95) and the low of March 11, 2008 (3.10) and extended to the right side of the chart. That line crossed March 17, 2008 at 3.14, which gives a nice support on the downtrending price. After hitting 3.15, the price bounce up and close at 3.20 that day and heads up on the succeding days.

Now we have identify our support, let us now assess our data and look for that level that will give us the resistance. Price retraces to its lowest at 3.70 on Feb 27, 2008 and bounce up. The 3.70 level gives a support during that retracement. When that support was broken, it reverse its role from support to resistance. We can identify the 3.70 level to give resistance to the rallying prices on its way up.

Having identified support and resistance, let us now look at our risk-reward ratio if we want to enter PAX. Closing price on March 24, 2008 is 3.45. If we don't have PAX and plan to buy the next day, March 25, 2008, we should study our chances of winning. Assuming it will open at 3.40 the next day, let us see how is our ratio if we will be buying at 3.40.

Risk is the difference between support and our planned entry price. The support line we have discussed above will be crossing at 3.18 on March 25, 2008. Entering at 3.40, our risk is 3.40-3.20 (The price based on fluctuation) which is 0.2.

Reward is the difference between resistance and our planned entry price. Subtracting 3.70 with 3.40, our estimated reward is 0.3.

Ratio is the quotient from dividing risk by reward. Our ratio therefore is 0.2/0.3 (2:3) or 0.67

Question: Is 3.40 a good entry? No because the best entry is at 1:3 ratio or 0.33. So what will you do if you want to buy PAX? Wait for an entry price that will give a ratio of 0.33 or lower. The odds should be in your favor.

What is Risk and Reward Ratio?

In trading the stock market, there is always risk and there is always reward. I'll start by defining these terms in the simplest way I can. Risk means the potential amount of money that you will lose in a trade and reward means the potential amount of money that you can earn from a trade. The ratio shows the relationship of the two. The risk reward ratio is derived by dividing risk by the reward. The lower the number, the better of course.

Though we want to be rewarded with the maximum profit, we should also understand that in every reward there is a corresponding risk. Many says that the higher the risk, the higher the reward. I disagree on that saying. You can control the amount of risk and maximize your reward if you do advance study and preparations before getting in the trade.

That will be the focus of this site. Although we will be presenting technical charts and we'll be doing technical analysis on stocks listed at the Philippine Stock Exchange, our goal is to learn how to determine the risk reward ratio that will control our risk while optimizing our profit. Our goal is to enter a trade where Risk Reward Ratio is 1:3 (0.33) or lower. The odds should be in our favor.

This site will give you ideas on the support and resistance of the stock using technical analysis. What it will not do is advise you an exact entry and exit point because risk tolerance of every individual varies.

A House for My Charts

Finally, my technical analysis charts found it's own place. Just creating my first post to get the feel of this house.