CAN A CHART SAVE A DISASTER?

Limit down movements are becoming frequent on stocks trading on the Bursa Malaysia. On Monday 11th May,three stocks, SEAL, GPLUS and one newly listed stock on Mesdaq, C Works limit down. Another stock, FORMOSTalmost went limit down, it actually limit down two days before. Investors and even analyst often cannot explain this phenomenon but put the blame on speculators who manipulates prices, especially if that particular stock price is low and thinly traded.

For the past few months, they were a number of stocks that went limit down. Apart from the few stocks that are mentioned above, other casualties are MAHJAYA, FAJAR, FOUTAIN, SUREMAX, GENSOIL, SANBUMI and others. These are stocks that are normally in the top 20 volume traded in the exchange. Those investors, many of them since they are always traded heavily got caught with surprise with these movements.

This is definitely not good for the exchange. Investors would not be confident trading stocks in the exchange if these happen to frequently. They will have to guess which stocks are going to face the same fate as those stocks. Many would stay out of the market.

Are there any symptoms that a stock may get limit down? Most got caught by surprise, as there are no clear signs that the stock is going limit down. For example, FAJAR has been moving in an up trend with increasing trading volume (See chart 1). This attracts investors as it looks like a good deal. For normal investors it looks like a good healthy trend. For the past few days before the limit down, the stock price seems to be in a correction period.

Chart 1: Daily FAJAR line chart the day before limit down

Another similar example to FAJAR price movement is SUREMAX. It goes in a healthy up trend without any indications of it going to turn down.

An example of a stock that has different price action than the above is SANBUMI. This stock moves sideways for a period of time after a good up trend rally (See Chart 2). This creates interest in some investors who speculate that it is going higher (since it is also always featured in the top volume stocks radar), and start to buy whenever there is a pull back.

Chart 2: Daily SANBUMI line chart the day before limit down

FAJAR for example, shows a bearish reversal pattern called the “evening star”. It indicates that price may reach the top and probably an end to the upward price movement. The indication is 3 days before the limit down, an early signal for investors to take their profits. For the more greedy ones, who thinks that it will go higher face the wrath later.

Chart 3: Daily FAJAR candlestick chart

The same indication is shown on SUREMAX, 5 days before the limit down. (See chart 4). Other stocks that have similar bearish “star” pattern are MAHJAYA on daily chart.

Chart 4: Daily SUREMAX candlestick chart

As for SANBUMI, signs of price reaching tops is indicated by no one, but two candlestick patterns and these patterns was detected at the end of January 2005 (See chart 5). Even if those who did not get out in January, they should when price broke the major support (It kept creating new lows earlier, which also means it was moving in a down trend) on 18 and 21 of March.

Chart 5: Daily SANBUMI candlestick chart

While some pattern may not occur on daily chart, they can be seen on a weekly chart, a longer term reversal pattern. While stocks that have no clear candlestick reversal pattern, a simple breakout on the support level may save the day. For example, GPLUS price broke the up trend support level on the 27th of April and later failed to go back above the support. This confirms the reversal of down trend after the breakout, just before it limits down (See chart 6).

Chart 6: Daily GPLUS candlestick chart

Unfortunately, we are unable to do anything for new stocks like CWorks because there is not enough data to identify anything. That is why most technical traders would not trade IPOs as there is not enough information on the price action. If enough information can be gathered even if the stock is newly traded, like MEXTER, a pattern can be detected. The first 2 days shows a bearish “star” reversal pattern.

Early detection can be detected on price charts and only those who have the discipline to listen what the market is trying to indicate able to react on the information from the chart. One of popular stock that shows sign of price reaching tops are E&O and E&O PROP (See chart 7 below). A few “dojis” appearing in this up trend may indicate price reaching tops and may start to reverse down.

Therefore, beware of stocks that have really high volume (but was previously low all the time) and have very steep upward movement because it may be manipulated, read the signs from the chart/market to avoid being caught with your pants down.

Chart 7: Daily E&OPROP candlestick chart as at 19 June 2005

Article by Benny Lee