Improve your decision making with multiple technical tools

Six month candlestick chart of the All Ordinaries Index (XAO)

The Buy or Sell Quandary

Technical analysis, beloved by some, scorned by others, is a market assessment aid which can increase the reliability of making correct calls such as the oft recurring quandary of “Do I Buy, or Do I Sell” in response to significant fluctuations.

The ambiguity mostly arises because in range-trading, the share-price oscillates between overbought and oversold positions, from which reversion to the mean can be anticipated. However, this scenario cannot be relied upon. Just as likely is the probability that the share-price will continue to fall or rise, entering into a new trend.

This post is written to suggest how the elderly investor, not necessarily fully au fait with technical analysis, may nevertheless use a few simple technical tools to improve their decision making.

The choice is important. Pick the wrong direction, or fail to act promptly when you should have, may result in regrettable capital loss, which may or may not be self-correcting with time. On the other hand, the loss may be mitigated, or even turned to a profit, with timely intervention.

An example: The 120 day exponential moving average in combination with trend-turning patterns

A moving average plot is a simple, basic indicator, which shows price direction and is a guide to market assessment of fair value, over any selected period. A personal preference is for a 120 day exponential moving average. This corresponds to approximately six months trading, which I usually select for my candlestick chart intervals.

The actual price action will usually fluctuate above and below the average. The inference is for the investor to be bullish and buy shares when price action moves above the average, and conversely bearish when it falls under the average. Not infrequently this disposition will persist for sometime, offering trading opportunities

Once it is clear that the share-price or share-price index has broken the bounds of range-trading, the ensuing trend will continue as long as the market dictates. The investor could well take this as a signal to implement a stop/loss strategy, but should at least refrain from trading against the trend until it ends. It is safer to delay changing tack until there is clear technical evidence of trend reversal.

Trend Reversal Chart Patterns

There are many possible variations in price-action appearance during the transition phase. Look out for them. Sometimes the onset is trumpeted by a dramatic reversal in demand in the form of an engulfing candlestick pattern, in which the market demand to buy or sell the shares exceeds in the opposite direction that of the previous day. Alternatively there may be just a slowing of the trend, possibly merging into a trading range, from which a new trend might emerge.

There are however a few well-recognized chart patterns which can usually be trusted as evidence of a complete turn-around in market sentiment. A word of caution however. Preferably, wait until the pattern is complete, and the new direction emerges. Markets in times of uncertainty may pause in trending, only to resume their original trend when fears are allayed, or bullish prospects revived.

The patterns I have found most helpful are:-

  • A head and shoulder pattern
  • A double top or bottom (occasionally triple)
  • A V-shaped reversal in which there is a succession of trending bars in the new direction.

The End of Financial Year Market Decline 2022

The XAO All Ordinaries Index is an index of the 500 largest ASX shares by market capitalization. The six month chart above shows the recent 16.9% decline in the stock market since a high of 7923.40 on April 23, to a low of 6581.60 on June 20, just before the 2022 financial year ended.

An old investment dictum recommends “Sell in May and go away”. If you had, you might have done nicely with your portfolio, profiting from the practice of many investors who reduce their tax liability by taking losses on some of their shares.

If you had sold shares on 6 May 2022 when the share-index fell well below the 120-day exponential moving average at 7610, you could now with the start of the new financial year, be looking to buy again to profit from the trend change which now appears to be emerging.

There has been a V-shaped direction alteration after a bullish engulfing pattern, followed by 4 upward trending candles. The subsequent 3 day pull-back ended in a “higher low” with a rise in yesterday’s trading. Should the rise continue, an important target to be exceeded is 6953.40, the previous high, when an uptrend could be declared. This should be a safe point to re-enter the market, if inflationary concerns fail to further spook the market.

Disclaimer

This post is for non-specific information and should not be relied upon for personal investment decisions. Readers are advised to always first seek qualified advice for their own needs.



Categories: Chart Review

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