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Monday 31 August, 2009

MACD - An overview

15 WAYS TO TRADE MOVING AVERAGES

Reading a chart without moving averages is like baking a cake without Butter or eggs. Those simple lines above or below current price tell Many tales and their uses in market interpretation are unparalleled.

Simply stated, they're the most valuable indicators in technical Analysis.

You can trade without moving averages, but you do so at your own risk.

After all, these lines represent median levels where your competition Will make important buying or selling decisions. So it makes sense to Predict what they're going to do before the fact, rather than afterward.

Here are 15 ways you can manage opportunity through moving

Averages:

1. The 20-day moving average commonly marks the short-term trend, The 50-day moving average the intermediate trend, and the 200-day Moving average the long-term trend of the market.

2. These three settings represent natural boundaries for price

Pullbacks. Two forces empower those averages: First, they define Levels where profit- and loss-taking should ebb following strong price Movement. Second, their common recognition draws a crowd that Perpetrates a self-fulfilling event whenever price approaches.

3. Moving averages generate false signals during range-bound markets Because they're trend-following indicators that measure upward or Downward momentum. They lose their power in any environment that Shows a slow rate of price change.

4. The characteristic of moving averages changes as they flatten and Roll over. The turn of an average toward horizontal signifies a loss of Momentum for that time frame. This increase the odds that price will Cross the average with relative ease. When a set of averages flat line And draw close to one another, price often swivels back and forth Across the axis in a noisy pattern.

5. Moving averages emit continuous signals because they're plotted Right on top of price. Their relative correlation with price development Changes with each bar. They also exhibit active convergence divergence Relationships with all other forms of support and resistance.

6. Use exponential moving averages, or EMAs, for longer time frames But shift down to simple moving averages, or SMAs, for shorter ones.

EMAs apply more weight to recent price change, while SMAs view each Data point equally.

7. Short-term SMAs let traders spy on other market participants. The Public uses simple moving average settings because they don't Understand EMAs. Good intraday signals rely more on how the Competition thinks than the technicals of the moment.

8. Place five-, eight- and 13-bar SMAs on intraday charts to measure Short-term trend strength. In strong moves, the averages will line up And point in the same direction. But they flip over one at a time at highs And lows, until price finally surges through in the other direction.

9. Price location in relation to the 200-day moving average determines Long-term investor psychology. Bulls live above the 200-day moving Average, while bears live below it. Sellers eat up rallies below this line In the sand, while buyers come to the rescue above it.

10. When the 50-day moving average pierces the 200-day moving Average in either direction, it predicts a substantial shift in buying and Selling behavior. The 50-day moving average rising above the 200-day Moving average is called a Golden Cross, while the bearish piercing is Called a Death Cross.

11. It's harder for price to break above a declining moving average than A rising moving average. Conversely, it's harder for price to drop Through a rising moving average than a declining moving average.

12. Moving averages set to different time frames reveal trend velocity Through their relationships with each other. Measure this with a classic Moving Average-Convergence-Divergence (MACD) indicator, or apply Multiple averages to your charts and watch how they spread or contract Over different time.

13. Place a 60-day volume moving average across green and red

Volume histograms in the lower chart pane to identify when specific Sessions draw unexpected interest. The slope of the average also Identifies hidden buying and selling pressure.

14. Don't use long-term moving averages to make short-term

Predictions because they force important data to lag current events. A Trend may already be mature and nearing its end by the time a specific Moving average issues a buy or sell signal.

15. Support and resistance mechanics develop between moving

Averages as they flip and roll. Look for one average to bounce on the Other average, rather than break through it immediately. After a Crossover finally takes place, that level becomes support or resistance For future price movement

Monday 24 August, 2009

Investing in an IPO? Read this!

Here is a simplified idea of how to analyse initial public offerings (IPOs) using technical and fundamental analysis.

There have been raging discussions during the past three years, both, when the Indian IPO market was booming and when it was crashing.

Should we invest in IPOs or rather buy the stock when it comes to the secondary market? The debate over this a long-drawn one with varying answers during boom and bust.

This article will try to give some tools and ratios, which help us decide whether to invest in an IPO or not at any time!

Analysis based on market value (market cap)

Market value in the case of an IPO can be defined as the number of shares available for subscription multiplied by the price per share plus the price per share multiplied by outstanding shares if any.

In the case of analysis, when there is a price band available, it's advisable to do the analysis based on the lowest price.

Check 1: Price to Sales (P/S) ratio

This number is derived by dividing the market value by the value of annualised sales. It can also be derived by dividing the price of a share by the sales per share. It is basically an indication of the amount the company is trying to garner from the market vis-a-vis its current business.

A rule of thumb for the P/S ratio when deciding on IPO investment is that lower the P/S ratio the better it is as an investment.

A word of caution is that it should not be the only parameter before deciding.

Check 2: Price to Earnings (or Loss) P/E ratio

This number is derived by dividing the market value by the annualised profits (loss) for the company. It is an indicator of the number of multiples that the market is ready to pay for the stock over its current profit levels.

If the profit is Rs 2,500 crore (Rs 25 billion) and number of equity shares is 1,000, then the P/E is 2.5. Meaning, the market is ready to pay 2.5 times the profit per share to buy the stock.

Thumb Rule for P/E with respect to IPOs

The lower the P/E, the better it is for the investor. In simple terms, a lower P/E means, you are getting to buy something that has the ability to reap high benefits at a very cheap price.

The irony is that during boom times uninformed investors get carried away by high P/E multiples.

Check 3: Price to Book value (P/B) ratio

The book value is defined as the difference between total assets and liabilities. In a more crude way, it is also defined as the amount that will be left back after paying all liabilities in case of a closure.

The P/B of an IPO is calculated as market value divided by the book value. It gives an idea on what value the market places on the stock based on its books.

Thumb rule: Lower the P/B the better. It would be advisable for a potential IPO investor to look for IPOs with low P/B. Some of these stocks are called value stocks.

Long-term investors buy such companies and hold on to them till they slowly but steadily grow their business till a day when the share prices might shoot up phenomenally and then exit with huge profits.

Check 4: Price to Tangible Book Value (PTBV) ratio

This number is derived by dividing the market value by the tangible book value. The Tangible Book Value (TBV) is equal to the book value of the company minus the intangible assets.

Intangible assets are those that cannot be seen or felt. Examples include IP rights, goodwill patents, etc. Similar to P/B, it can also be crudely seen as the amount an investor would get if the company ceases to exist and all its assets have to be sold.

The reason it is seen separately is that most intangible assets would be very difficult to sell in case of closure.

Thumb rule: Lower the PBTV the better. A PBTV of 0-1.0 (zero to one) means the company is trading at or below the worth of its own tangible assets. Once the mark crosses one, the risk for the investor too is proportionally higher.

In case of certain companies the PBTV could be negative too.

Check 5: Gross margin percentage

The gross margin percentage is derived by dividing the gross margin of the company (the margin before accounting for taxes, depreciation, expenses, etc) by the total value of sales. This gives an idea of what is the percentage of margins for any value of sales.

Thumb rule: Higher the gross margin the better. This in simple terms indicates that the company's product of service has a good margin of income. The higher the gross margin, the better would be the actual profit. For certain industries where costs are very high the gross margin percentage would be low.

In such cases, we need to analyse if it's higher than for other competitors in the same domain of business.

Check 6: Profit margin percentage

This number is derived by dividing the profits by total value of sales. Again, as in the case of gross margin percentage, higher the profit margin percentage, the better it would be to invest in the IPO of that company.

A word of caution, though. The gross profit margin percentage and the profit margin percentage should be analysed for at least 3-4 years to check for consistency.

Some companies might show higher margins due to one off reasons which might not hold true after the IPO.

All the above calculations need to be taken into consideration along with the analysis of the company's management, its business model, the sustainability of its product/service and other such fundamental parameters while deciding to invest in an IPO or not.

Source: BankBazaar.com is an online marketplace where you can instantly get loan rate quotes, compare and apply online for your personal loan, home loan and credit card needs from India's leading banks and NBFCs.Copyright 2009 www.BankBazaar.com. All rights reserved


Saturday 22 August, 2009

Is the stock market a gambling arena?

Many people shy away from the stock market thinking it is a lot like gambling and some even think it is gambling. The vagaries of the stock market in the form of sudden spurts and dizzying falls only add fuel to this thought.

Adding fuel to the aversion is the past pain from few experiments -- many in their 40s are still not entering the market because they were hurt by the Harshad Mehta scandal!

Short-term trading versus Investing
The goals for any investor in the stock market change very dramatically based on whether he is a short-term player or a long-term one. In the short term, the market has to be perform the role of an income generator for the trader/investor. In the long term, it has to give capital appreciation for the investor.

The first thing to remember is that when we buy a stock (a share in any company), we get a part ownership in the company. We have a right to a part of the assets and a part of the profits that the company generates.

The price of the share will be reflected by the current and future profits of the company and also by the various forces that affect the business of the company. There are several macro-level factors such as the political, social, and international environment too that affect the business and hence the share prices.

Shares are best for the long-term investor
To generate income out of shares is possible in two ways:
Wait for the dividend. This income is going to be quite low compared to the market price of the share. Typical Indian dividend yield (dividend per share/market price of share) is in the range of 1% to 2%. Not quite attractive.

The other way is to generate trading gains. This is highly risk laden as inherently share prices follow randomness. The Random Walk Theory says that the events in the past do not affect the price of the shares in the future. Hence, it is not possible to predict the future price of shares. This means that to generate income by trading one has to speculate. That is gambling.
In the long run (three years and above), however, the scenario is different. There is sufficient control for the management of the company to steer it to success or failure. And this will be reflected in the stock market as rise or fall in the share prices.

As an investor in the company, we too get signs on whether to hold on to the share or to let it go. In the short run companies can fool its investors by changing some numbers and by making good presentations but in the long run to compete and to grow, they have to deliver value.

Returns in the long run
The stock market remains the undisputed and consistent leader for returns in the long run. In spite of the economy slowing down in India and going into a depression in many parts of the world, the historical Sensex returns are still very attractive.

The Sensex was formed as an index to reflect the stock market movements in the year 1979. The value at that time started at 100. On August 14, 2009 this figure stood at 15,400. This translates to a compounded annual growth rate of an amazing but true 18.28%.

We cannot see any other asset class giving such returns over the long term. Is there a reason why stocks perform so well in the long run? Yes, there are.

As business people, the promoters of the companies have an inherent reason for working towards the growth of their companies. Also businesses need time to grow and flourish.
As businesses compete with each other during their growth, they come out with creative, efficient and effective solutions to our needs and problems. This creates value for us as consumers and as investors. The country itself grows because of this.

Case in proof
A case in proof is a Bangalore family that was surprised by the value of shares that their late father had accumulated. He had bought shares of Hindustan Level Limited (HLL -- now Hindustan Unilever Ltd) consistently for over 20 years from whatever savings he could scrap from his earnings as an executive in a private company.

At one point in time HLL was the largest company in India and he loved the company. Post his retirement he continued to hold the shares in the material form itself. After he passed away, the family found that he had over Rs 1 crore (Rs 10 million) worth of HLL shares!

Stock market is not a gambling arena
The stock market is a tool for investing and wealth-creation. As discussed above it is a way to create wealth in the long term. It should not be mixed with gambling nor should it be used for that purpose.

Like gambling, it might be thrilling in the short term but too much indulgence in thrill at the expense of strong fundamentals could lead to major losses.

Ironically, the media and the people around us always highlight the extremities rather than focus on the fundamentals. For example, a person losing Rs 500,000 in one day is given more importance than someone earning the same amount in three years. This has been the major cause of creating a negative picture of the stock markets.

We need to come out this imagery and look at the broader and long-term picture. Long-term investors can never lose money in the stock market if the fundamentals are right!

BankBazaar.com
Source: BankBazaar.com is an online marketplace where you can instantly get loan rate quotes, compare and apply online for your personal loan, home loan and credit card needs from India's leading banks and NBFCs.Copyright 2009 www.BankBazaar.com. All rights reserved