NUSInvest Workshop Series
Session One
Introduction to FA/TA
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FA vs TA
FUNDAMENTAL ANALYSIS
Fundamental analysis of a business involves analyzing
its financial statements and health, its management and
competitive advantages, and its competitors and
markets.
EconomicAnalysis
Industry Analysis
CompanyAnalysis
TECHNICAL ANALYSIS
The study of market action, primarily through the use of
charts, for the purpose of forecasting future price
trends.
• All information is reflected in price (responses & sentiments)
• History repeats itself
• Technical Analysis can be applied to different trading
mediums/markets/assets
FA vs TAFUNDAMENTAL ANALYSIS
• Focuses on the economic forces of Demand & Supply that causes prices to move
• Finding the intrinsic value of the market/asset
• Characteristics of a company is employed in the analysis
• Effects of economic factors on a stock such as earning reports, cash flow, etc are concerned
• Analysis using past data of Demand & Supply
• Study of historical graphs is stressed
• Identify a trend at a relatively early stage & ride on that trend until the weight of the evidence shows or proves that the trend has reversed
• Deals in probabilities, never certainties
TECHNICAL ANALYSIS
Efficient Market Hypothesis
Criticisms of FA and TA 3 Versions: Weak / Semi-strong / Strong
Impossible to "beat the market" because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information
EMH: stocks always trade at their fair value (impossible to purchase undervalued stocks or sell at inflated prices)
Intro to TA
Charts
• Candlesticks stresses relationship between open and close prices
Candle Anatomy• Body: Distance between open and closing
• Tip of upper wick/shadow: Highest price of that
period
• Bottom of lower wick/shadow/hair: Lowest
price of that period
• Range (length) of candle stick indicates volatility
• Upward candlestick usually white or green or
blue
• Downward candlestick usually black or red
BullishCandle
BearishCandle
Gaps• Gap: Current open is not the same as
prior closing price
• No price and no volume transacted hands between the gap (area on price chart where there is no trades)
• Effect of news after stock market closed for the day (e.g. earnings report)
• Psychology: Can act as resistance/ support (news that sparked the gap is still in play)
Daily Chart – Wal-Mart (WMT)
1 Price-Bar Pattern
Hammer
• Found in downtrend• Short body at the top of price range• Little to no upper shadow• Lower shadow must be at least
twice the length of real-body• Signals: Reversal pattern when
found in a downtrend• Short-term outlook indication• Real body can be black or white
(white: stronger signal)
Hammer
• Low reliability, requires confirmation– Bullish gap for next session– Subsequent session shows white real body above that of
the hammer’s real body
• Significance/ Strength:– Length of Lower Shadow– Colour
Long lower wick indicates initial selling prices
Buyers drive prices back upto close near the highs
BACKGROUND1-BAR
PATTERN2-BARS PATTERN
3-BARS PATTERN
PRICE TRADING STRATEGIES
Hanging Man
• Found in uptrend• Short body at the top of price range• Little to no upper shadow• Lower shadow must be at least
twice the length of real-body• Warning of a potential downward• Short-term outlook indication
• Also requires confirmation
Hanging Man1. Uptrend2. Gap Up3. Lower Shadow at least twice as big as Real Body4. Real Body Bullish or Bearish; better if Bearish5. Confirmation Candle
Greater gap: Higher likelihood of reversal
Shooting Star• Found in uptrend• Short body at the bottom of price
range• Little to no lower shadow• Upper shadow must be at least
twice the length of real-body• Signals: Reversal pattern• Short-term outlook indication• Real body can be black or white
(black: stronger signal)
Shooting Star• Low reliability, requires confirmation
– Bearish gap for next session– Subsequent session shows black real body below that of
the shooting star’s real body
• Significance/ Strength:– Length of Upper Shadow– Colour
Long upper wick indicatesinitial buying prices
Bears were able to rejectbulls completely (or push prices evenlower by closing below open)
Open
Shooting Star
1. Uptrend2. Upper shadow at least twice as big as real body3. Real body bullish or bearish (bearish: stronger indication)
Inverted Hammer
• Found in downtrend• Short body at the bottom of price
range• Little to no lower shadow• Upper shadow must be at least
twice the length of real-body• Signals: Reversal pattern• Short-term outlook indication• Real body can be black or white
(white: stronger signal)
Inverted Hammer
Spinning Top & Doji• Short body in the middle of two long
wicks• Market closed relatively unchanged• Indicates indecision (‘standoff’ after
significant price movement)• Trend losing momentum; possible
turning point
• Doji/ Long-legged Doji: stronger signal
• Open and close are the same• Insignificant in sideway markets
Buyers in control
Sellers in control
Dragonfly Doji Gravestone Doji Four Price Doji
• Long lower, no upper
• Long upper, no lower
• Same upper, lower, open & close• Very rare• Low volume situations
More Doji Patterns
2 Price-Bars Pattern
Bullish Engulfing Candle
Gap down
When found in a downtrend:
• Bullish candle opens lower than previous candle’s close, closes higher than previous candle’s open
• Potential sign that trend is reversing
• Indicates control has shifted from sellers to buyers
Bearish Engulfing Candle
When found in a uptrend:
• Gap up: Bullish sign• But: Bulls only push prices up
slightly before bears take over and push prices much lower
• Potential sign that trend is reversing
• Indicates control has shifted from buyers to sellers
Gap Up
Bullish Engulfing
1. Downtrend2. Bearish Candle3. Gap Down4. Bullish Candle5. Close above previous Bearish Candle
3 Price-Bars Pattern
Morning Star• Consists of 3 candlesticks
• Bearish Gap: Bears are in control during opening
• Day 2: Prices are not pushed much lower (small / neutral candlestick)– Bullish: stronger sign
• Day 3: Bullish gap up• Prices pushed further upward,
sometimes eliminating all Day 1 losses
Evening Star• Consists of 3 candlesticks:
- Bullish, Small/ Neutral, Bearish
• Presence of bullish gap, bearish gap
• Day 2: Prices are not pushed much higher– Bearish: stronger sign
• Day 3: Large bearish candlestick• Prices pushed further downward,
sometimes eliminating all of Day 1’s gains
Evening Star
1. Uptrend2. Bullish Candle3. Gap Up4. Small Bullish/ Bearish Candle5. Gap Down6. Bullish Candle
Morning Star Pattern
Many other chart and price patterns, indicators,
theories…
CHART CONSTRUCTION
SUPPORT & RESISTANCE
Reversal Patterns
CHART CONSTRUCTION
SUPPORT & RESISTANCE
Others
• Fibonacci• Continuation Patterns• Moving averages• Oscillators and momentum indicators• Pivot Points• Trading Divergences• Elliott Wave Theory• …
Resources
• Babypips.com• Forexfactory.com
Intro to FA
Basics of FA Buy and Hold
Latch onto a good business and allow investor’s assets to
grow with the business
Value Investing
Seek under-valued companies
Dividend Investing
Seek blue chip stocks that generate dividends consistently
Top-Down Approach
Starts with analysis of global economics• E.g. GDP, Interest Rates
Narrows down to regional/industry analysis • Total sales, trends, Growing/Sunset
Basics of FA
Basics of FA
Bottom-Up Approach
Starts with specific businesses, regardless of industry/region
Basics of FA
Qualitative & Quantitative
Intrinsic Value (true value, not necessarily market price) Find opportunities to buy at a discount Wait for investment to pay off when market catches up
Industry Factors• Industry life cycle
– Emerging, Growth, Maturity, Decline
• Key Trends– E.g. Airlines: Fuel Cost; Jewellery: Gold Price; REITs: Interest rates
Company Factors• Business Model
• Competitive Advantage
• Management (ownership - founder? Insider shareholdings?)
• Market Share– Competitors’ Performance
Financial Ratios
Liquidity Solvency Efficiency
Profitability Market value
• 5 types of financial ratios
Price Earning Ratio (P/E)
• Price of Share divided by Earnings per share (EPS)
• Values the share based on earnings
• The lower the PE compared to similar companies the
better the value
• However, more research the reason behind low
valuations
EBIT
• Earnings Before Interest and Taxes
• Adds Interest and Tax Expense to NI
• Gives a clearer picture of company’s ability to
generate profits
• By taking away distortions from financing cost
and tax structure
EBITDA
• Earnings Before Interest Tax Depreciation
Amortization
• A PROXY of Operating cash Flow
• Important in determining firm’s ability to
generate cash
Price to Book Ratio (P/B)
• Compares stock’s market value to its book value
• A low P/B ratio could mean that the stock is
undervalued
• Also gives some idea of whether you’re paying
too much for what would be left if the company
goes bankrupt
Earnings per Share (EPS)
• The only financial indicator companies are mandated
to provide in their annual report
• One of the most important indicators of profitability
• Shows the ability of each share in generating
accounting profits
• Trend is important in analyzing EPS
Debt to Equity
• Most common leverage ratio
• Shows us the capital structure of the firm
• Can indicate financing expenditure, solvency
of the firm
Profit margin
• Net Profits/Net Sales
• Shows efficiency of revenue in generating
profits
• Important in evaluating efficiency within the
industry
Return on Equity
• Net Income / Total Equity
• Shows how much of income is attributable
to equity holders
• Also shows how efficient company is
generating profits with given capital
Other Ratios
• Current Ratio
• only measures short term liquidity status
• Current Assets / Current Liabilities
• Return on Assets (ROA)
• More…
Resources
• Bloomberg terminal• Bloomberg.com• Investopedia.com• SGX.com• Equity Research Reports
CHART CONSTRUCTION
SUPPORT & RESISTANCE
Thank You!