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Saturday, October 18, 2014

A Canary In The Coal Mine

Definition : A canary in a coal mine is an early warning of danger. It is a definiton to caged canaries (birds) that mining workers would carry down into the mine tunnels with them. If dangerous gases such as methane or carbon monoxide leaked into the mine, the gases would kill the canary before killing the miners, thus providing a warning to exit the tunnels immediately.

As can be clearly seen during this October sharp market correction, we need a canary in a coal mine to warn us of impending danger in the stock market.

Despite of so many market experts, NONE knew the timing when it came to this October carnage.

However, I did warn of some "red flags" ahead in a September 25 posting titled "Chart Points To Watch: KLCI & US" .. as I noticed the KLCI Index dropping below the 200 day moving average line. (also called The sell all signal).

But never in my wildest dreams did I think the market correction will come so fast and so bad!

It goes to show how "difficult" it is to predict the stock market irrational behaviour, if not, many investors will be multi-millionaires by now.

So we need an advance warning system a.k.a  ..a canary in the coal mine ..to warn us of impending market dangers before the big storm approaches.

1) The KLCI Index 200 day MA



Watching the KLCI Index closely might provide some "clues" as to when the stock market might suffer a sharp correction ....especially when it break the 200 day moving average line but for most people it could be too late!

When I told my friends to sell their shares, they are reluctant to do so because by this time those shares have already dropped a lot from their highs.

This is one good indicator if it is not manipulated as the govt funds like EPF, LTAT, Khazanah are controlling this index. Many times you see the index break the 200 day MA only to jump back up again (a false breakdown).

2) The "all-time high" market volume


On August 20th a Wednesday, the total market volume hit 7.669 Billion shares, an all time record high. It was mostly due to the trading of penny stocks. Read the article " Bursa trading hits all-time high".


The "all-time high" market volume is a big Red Flag because in the past, the market corrects sharply after this event happened because this indicate extreme bullishness!

Also, with such high volume, it is obvious that many investors have over extended themselves over their respective financial limits.

3) The Penny Stocks Rally


On a daily basis, you see the only action in the market is the market rumors, high vol, the jumping of penny stocks.

In stock forums, you see only the majority of postings in penny stocks threads.



In most markets, penny stocks are usually the last categories of stocks to move after all others categories of stocks become too expensive to own.

They (penny stocks) also indicate the correction or bear is coming as during this final phase, there are usually lots of newbies investors and punters with irrational behaviour coming into the market for a quick profit.

Conclusion

With the 3 canary in the coal mine I've listed above, which unfortunately all of them have already happened, hopefully for the future we are more aware of the warning signs before investing.


Wednesday, October 15, 2014

Sumatec - The classic pump & dump

Author: Random Trading | Publish date: Wed, 15 Oct 23:58 GOOD ARTICLE TO SHARE

                     
                         Chart : Sumatec daily chart as of Oct 15 2014 (Source: ChartNexus)

                       
                             Chart : FBMKLCI daily chart as of Oct 15 2014 (Source: ChartNexus)

The selling down of the past 2 weeks has caused the KLCI broke its 3 years uptrend line. The market has been running for last 3 years without any correction so I believe the Bull is tired and current weakness could just be a healthy correction which is in line with the world market. 1700 will be a critical support if it breaks then Bear may start to creep in.

But the same can't be said for certain penny stocks. Sumatec, the darling of the market, has seen breaking every level of support and almost reach the level before it spike. It is quite a classic pump and dump example. During the run up of the share price, there were a lot of 'good news', exciting corporate exercises, rumours and 'great prospect' flying around. These days forums, blogs, twitters and facebooks are all good platform for the promoter to spread the good news and how good is the prospect of the stock. With 'target price' of RM1, RM 10 and RM 20 couple with well known public figure as well as asset injection, it is quite enticing to retail investors. One might not believed it at first but when the share price keep going up,it is very hard to see yourself missing the boat.

The Aug 20 plunge of the stock price from over 60 sen to 40 sen was the end of the run for the counter. But the promoter was more careful when distributing their shares on the following weeks till today. The counter only closed one or two sen down most of the days with occasional rebound so there will be no panic from retail investors and they can keep distributing their shares orderly. At 40+ sen, there were a lot of investors that stuck with the high price went to average down and a lot of investors that miss the first run went into the stock as it deems 'cheap' at the time. I believe the promoter distributed most of their shares in this range as selling at the top is never their intention but distributing shares at the price that people are willing to support is what they are hoping for.

So what now? Some may still want to believe that it is just weak market sentiment and the share price will rebound to 60 sen or more. But deep down we know that when a stock doubled its share price in 2 months time and back to square one in the following 2 months then it most likely a classic pump and dump case just like the what happen to INGENCO, MTRONIC, NICORP, AGLOBAL (now rename as NEXTNAT) and PATIMAS (if you still remember this now delisted stock). For those who think that TSHS won't let his share just die like that, just like I mentioned in my previous post : Sumatec - What is the end game of TSHS? , I think the share price is nothing of his concern as he already cash out with the injection of his oil field. As for the RI, I believe we all know that the odd of it going through is pretty slim now.

Will the share price rebound to 60 sen or higher? Ya, everything is possible in this world but I think even 40 sen is quite a distance let alone 60 sen and above. Why? Because a lot of investors that get stuck with high price are looking to cut their losses at the first chance they have so there will be quite a selling pressure when the stock rebound. So God bless those still holding the baby!

Source : http://klse.i3investor.com/blogs/RandomTrading/61832.jsp

Saturday, October 11, 2014

Why The Stock Market Dropped?

Many theories abound as to why the stock market dropped sharply since the October month began ...some good answers and others really crazy!

Bear with me as I try to explain my version as to why the stock market dropped which is simply due to The Ending of QE3 scheduled in October 2014.

But first what is QE and how does QE works ?

Source: WSJ.com

Looking at the past QE programs, we can safely say that the ending of another QE program - QE3 WILL have a negative impact on the stock market.

Source: Doug Short (dshort.com)
                    
The first thing you will notice that the end of QE1 cause the stock market to drop -13.26% and in QE2 a decline of -17.9%. As we enter the final month of QE3, the same thing could be happening yet again!

The "logical explanation" is that without the FED pumping the money, stocks could not stand on their own two feet. 


The point is, at the end of a MAJOR Fed program like QE3, the LARGEST among the 3 QE, investors MUST simply be aware of what's coming over the horizon. The risk of a major market decline is very real, whether we as investors like it or not!

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