Presented by:

Juan G. Barredo

Vice President

Chief Technical Analyst

COL Financial Group Inc.

“Technical Analysis – Part 2

Technical Indicators & Market Cycles”

COL Financial

Group Inc. Presents

Outline • Review of Part 1

• Technical Indicators

– Moving Averages

– MACD

– RSI

• Market Cycles

– Bull and Bear

– Elliot Wave

– 4 Market Modes

• Building the plan

Part 1 Review Looking into Trends

1. Identify your Trend (check support/resistance)

UP – Higher Highs and Higher Lows

DOWN – Lower Highs and Lower Lows

SIDEWAYS (Consolidations) – Not any of the above

2. Sketch out appropriate Trendlines;

readjust when necessary then follow its cue.

Up Trendlines – must be drawn by connecting higher

lows or bottoms to determine the rising demand base

Down Trendlines – must be drawn by connecting lower

highs or tops to outline the presence of exiting supply

Support and Resistance

Reversal of Roles

Resistance now

acting as Support

Resistance

Support

Trends & Trendlines

Up Trendline

Down Trendline

Magnitude & Duration

Time

(Duration)

Pri

ce

(Mag

nit

ud

e)

(1) Correction in Time

(2) Correction in Price

This principle states:

“It takes time for price to move towards its intended target.”

… any exaggeration must eventually be paid for in time and/or price.

50

45

40

35

30

25

20

15

Technical Indicators

Technical Indicators • A technical indicator is a study of price data

derived from various statistical formula

plotted onto a graph

• It serves three basic functions:

– To Alert

– To Confirm

– To Predict

• Generally TI study two aspects of markets:

– Trend Momentum (ability to move)

– Trend Quality (durability)

Consequential Price Movements

• Momentum studies trend durability. It attempts

to discern the speed and durability of a Trend

move – just as if you were gauging the speed of

a car by looking at it’s speedometer

• Drawback:

• Does not work well in Consolidations

• Three indicators:

• Moving Averages (MAs)

• The MACD

• Relative Strength Indicator (RSI)

Momentum Indicators

• A price-average line plotted

onto a chart in direct reference to

market price

• It can be used to:

• Identify trends in various

time frames

•Identify points of power -

support and resistance

• Qualify strength of trends

•A 10-day Moving Average will be

computed as follows:

Ave. Price = (Price of day 1 +

day 2 + day 3 +… price of day

10) / 10

We use three period Moving Averages:

65-day =1/4 a year (trending MA) 130-day = ½ a year 260-day = 1 year

You can also use 32 & 16 day MAs to decipher faster (shorter) trends.

Moving Averages

Moving Averages: 16-day MA 32-day MA 65-day MA 130-day MA 260-day MA

Moving Averages

•Moving Averages may replace trendlines in identifying trend

configurations; smaller averages point towards shorter term trends, etc.

Short Term

Medium Term

Long Term

Moving Averages

•How to use: Buy above the line or stay long; sell or stay out below it

• Crossover of smaller MAs over/below bigger MAs reinforce the trend

Sell

Crossover

Sell

Sell

Buy

32-day MA

65-day MA

S

S

S

Lopez Holdings 16-day MA 32-day MA 65-day MA 130-day MA 260-day MA

S

Moving Averages

• After a breach the next MA becomes the next support or resistance

R

R R R

R

Short Term Ave: 16-day MA 32-day MA

Moving Averages

• Stocks trading and staying above short term averages show power; a

breach beneath it shows a loss in upward momentum

• MA in proper sequence order will re-emphasize the trend durability

• A lagging but effective momentum tool that

uses a crossover system to justify changes in

periodic trends.

• It has three component lines:

MACD (Moving Average Convergence Divergence)

• MACD

• Signal line

• Zero line

• The MACD being above or below the Signal Line will

call either a Buy or Sell read:

•MACD crossover above the Signal line = BUY

•MACD crossdown below the Signal Line = SELL

• The MACD being above or below the Zero Line will

call the effective trend bias:

•If the MACD is above the Zero Line = Up Trend

•If the MACD is below the Zero Line = Down Trend

•Note: Move in only on stocks showing an MACD BUY

in an UP TREND; take profits when a SELL is shown

MACD (Moving Average Convergence Divergence)

Buy

Sell

Buy Sell

Buy

MACD (Moving Average Convergence Divergence)

Posi

tive

M

om

entu

m

Neg

ativ

e M

om

entu

m

Buy Sell

Lopez Holdings

Moving Averages

• Remember: Buy only when MACD shows positive

crossovers and not MACD crossovers below zero

Sell Sell Buy Buy

• A momentum-oscillator that swings to and fro an

Overbought or Oversold conditions to highlight

extreme ends of a price move.

• It too comes with three component lines:

RSI

80% Line

20% Line

RSI (Relative Strength Indicator)

A divergence is a

lapse in strength

shown by the RSI

compared with its

Prices.

i.e higher-high in price

compared with a

lower-high in RSI.

This produces bearish

connotations that

could lead to a larger

corrective tug.

RSI (Relative Strength Indicator)

Putting it all together

Looking for a SETUP:

•A SETUP is a condition that presents

concurrent readings by most, if not all,

technical indicators.

• It is the best time to execute a trade.

• A Setup fittingly filters short-term price swings

that are commonly unreliable and unmasks

distinctive trend moves that are less subject to

speculation and supposition.

Preparing your plan/checklist

Is there a Trend? (Draw trendlines) Yes

Check Moving Averages With you?

Above 65, 130, 260?

Check MACD With You?

Buy signal above ‘0’?

Check the RSI With You?

Overbought?

Divergence?

Decision Time IF 3 or ALL SAY YES… THEN GO!

IF ONE SAYS NO… BEWARE THE UNDERTOW.

IF TWO SAY NO… YOU SAY NO!

Is there a Trend? No

Lengthy Consolidation Yes

Just Stay out!

Lengthy Consolidation No

Be watchful of support and resistance.

Wait for a breakout condition.

Do not anticipate unless YOU ARE SURE!

Preparing your plan/checklist

Market Cycles

Market Cycles

Cyclicality of markets:

A) Most markets are cyclical

B) They follow / precede the

basic business cycle

C) Cycles may not always

be regular in time and

magnitude, but they

usually start off with an

expansion phase then

followed by a contraction

phase

D) Thereafter it begins a

new cycle

Market Cycles

Recession Early Recovery Full Recovery Early Recession

Market Low Bull Market Market Top Bear Market

A) Stock Market swing always

move first than the business

cycle

B) They bottom out while things

still look bleak; they top out

while things still look good

C) This is because markets are

always forward looking and

sensitive to advance

projections and guidance

D) This explains why investors

get caught into tight spots –

because of disbelief in trend

implications

The Bull and Bear Cycle

High Unemployment

Capital Spending ↓

Corp. Profits ↓

FDI ↓

Stocks Undervalued

Credit ↓

Employment ↑

Liquidity ↑

Exports ↑

FDI ↑

Infrastructure

Spending ↑

Stocks ↑

Tourism ↑

Employment ↑

Wages ↑

Capital spending

↑↑

Stocks

Overvalued

Credit Expands

Real Estate ↑↑

Inflation ↑

Interest Rates↑

Overinvestment

Excess capacity

Inventories ↑

Headline in

press very

positive

Excess Credit

Stocks Soar

Credit Growth

Slows

Corp profits

deteriorate

Stocks-Failure

on new highs

NPLs ↑

Banks Tighten

lending

Condo Sales

drop

Credit tightens

Economic

numbers fall

Car, house,

appliance sales ↓

Real estate ↓

Bankruptcies

Hotel vacancies

Unemployment↑

Trading Volumes ↓

Capital Spending ↓

Interest rates↓

Foreign

participation↓

Currency weakness

/ devalues

Utmost pessimism

Market Life Cycle

The Elliot Wave

EW made up of:

A) Five Advancing or Impulse waves

B) Three declining or Corrective waves

Cycle within a cycle:

A) Longer impulse waves in

Bullish phases

B) Longer corrective waves in

Bearish phases – a 5 wave

correction may herald a

more bearish phase

“Weak Bull” Swing or Range Trading

“Strong Bull” Momentum Trading

Identify your Market Phase

“Strong Bear” Momentum

Trading

“Weak Bear” Swing or

Range Trading Warning

Distribution

Bearish Recovery

Accumulation

Bullish

Identify your Market Phase UP DOWN

Swing Mode Momentum Mode Swing Mode Momentum Mode

“Weak Bull” “Strong Bull” “Weak Bear” “Strong Bear”

Ranges & Gradual Channels

Strong Channels & Runaway shifts

Ranges & Gradual Channels

Strong Channels & Runaway shifts

- Range Trading - Buy breakouts - Range Trading - Short breakdowns

- Buy Low Sell High - Buy and Hold - Sell Rallies Buy Dips

- Short and hold

- Price > 65-day MA but correct below 32-day MA

- Price > 16&32-day MA and MAs are in upward sequence

- Price < 65-day MA but rallies above 32-day MA

- Price < 16&32-day MA and MAs are in downward sequence

- MACD buy - MACD buy - MACD sell - MACD sell

- RSI below 40 then rolling up

- RSI > 50 - RSI over 60 then rolling down

- RSI < 50

Preparing our View and Plan

1. Get a broad look at markets

• Macro – Global Markets (indices, currencies,

commodities, bonds)

• Micro – PSEi, Sectors, standouts and fallouts

2. Determine what phase your are in

3. Pick out your watch list

4. Use classical and Technical Indicators to filter

your choices

5. Prepare your trading plan

• Sort out your target ranges

• Identify your stops

• Measure your risk-reward potential

• Act out on qualified trades

What to do?

What we have learned

1. Technical Analysis 2. Classical Approach 3. Technical Indicators

1. MAs 2. MACD 3. RSI

4. Market Cycles 5. Fostering your market view

and trading plan “Knowledge born from actual experience is the answer to why

one profits; lack of it is the reason one loses…”

- Gerald M. Loeb