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Technical Analysis
Dow Theory is a type of technical analysis that assumes the stock market movements
are rise or fall together and economic trend can be predicted (Copsey, 1999). Dow
and Hamilton stated that there are three types of price movements for the Dow
Theory: primary movements, secondary movements and daily fluctuations. Primary
moves can be indentifying from a few months to several years and it can determine
the trend of the market. The primary upward trend market is representing the bull
market and downward trend is representing the bear market. Secondary movements
are move in opposite direction of the primary trend from a few weeks to a few
months. Therefore, the secondary trend movement are regularly more volatile than
those of the primary move. Daily fluctuations always go with or against the primary
trend and within a few hours to a few days, but not exceed a week (Stock Charts,
2010).
STAN.L is in bull trend because the price is moves according to the support line. It
doesn't move straight upward but has some corrections along the way.
1
In figure 3, the impulse wave for Standard Chartered is follows a bull trend. The
graph show that the three waves in the direction of the upward trend (1, 3, and 5) and
wave 5 is the end of the bull market because it already achieves the new highest price.
After that, the share price fall drastically during 2008 and corrective wave is begin to
show the bear trend (A and B). But the wave A seems to be the bottom of the bear
trend and wave B continued to rise after 2009 and achieve the new peak compare to
wave 5. So, the wave C will fall that predict STAN.L price will drop in the future.
Chart Patterns
Investment analysts always look for the patterns to indicate the direction of the
market. There are two major types of patterns that are reversal patterns and
continuation patterns. Reversal patterns provide an indication that the market is
turning in its primary trend and continuation patterns provide an indication that the
market is going continue in the same direction (Dawson and Steeley, 2003).
In figure 6, volume has a greater significance in the head and shoulders pattern. The
higher price on the left shoulder will reflect the high volume as it shows on figure 6.
However, the volume during the head is less than the volume during the left
shoulder. The decreases in volume along with new highs that form the head serve as
a warning sign. Bargain hunters are not aggressive then before that can be show on
the volume. On the last rallying, volume on right shoulder increase and signalling
that the buyers may have exhausted themselves. Standard Chartered share price
break the neckline and the pattern is complete. STAN.L share price is falling and the
bear market start.
MA (Moving Average)
MA is type of technical analysis to indicate the trend of the market and help to
predict the market turning point. The share price will use as an indicator to form a
trend and it do not predict the price direction. A short MA will respond more quickly
than a longer period MA (Greene, 2008).
Golden Cross
Death Cross
Golden CrossFigure 8: Moving Average Triple
from 2005 to 2010
Death Cross
In figure 8, there are 3 moving average line that the red colour represents the 50
period, green colour represent the 100 period and purple colour represent the 200
period of MA. The interaction between 50 day and 200 day of MA can use as an
indicator of a switching between a Bull and a Bear market. The golden cross is
usually show the start of bull market and death cross is show the start of bear market.
In figure 8, the 50 day and 200 day had cross around end of 2006 and Standard
Chartered share price is moving up and signifying the start of bull market. It creates
the buy signal for the investor to enter the market. Next, the line cross again at end of
2008 and the 200 day MA is moving above the 50 day MA. It shows the death cross
and the STAN.L share is falling and start of bear market. It creates a sell signal for
the investor to quit the market. At 2009, the 50 day MA is cross against the 200 day
MA and the golden cross occur. As STAN.L is on bull trend during 2009-2010, it
creates the buy signal again and the share price is achieving a new peak.
Fundamental Analysis
Ratio Analysis: Value Investing
In fundamental analysis, I choose value investing as my stock picking strategy.
According to Chan and Lakonishok (2004), value stocks have made higher returns
compare to growth stocks. The analyst had done the experiments over the small-cap
stocks and large-cap stocks and the result show that value investing is more suitable.
It was because value stocks had less effect compare to growth stocks when the stock
market in the downturn. There are several studies prove that extrapolative biases in
investor behaviour might affect the investment decision. Investors are overbid the
prices of growth stocks as the prices of value stocks dropped far below their value
based on fundamentals. Therefore, value investing is the best choice for long-term
investment strategy.
government bond yield is 4.18%. Therefore, the dividend yield should be 2.79% to
meet the criteria.
Chartered is fail on earning yield, PE ratio, dividend yield, P/B ratio, and debt to
equity ratio, therefore, the share price is not undervalue. Next, we use target price
model to calculate the intrinsic value of the share. So, Standard Chartered share price
in target pricing is higher than current price but after our justification the share price
is not undervalue because the estimate EPS is too high for current market. The DDM
also show that the Standard Chartered share price is overvalue by our estimation for
constant growth and 3-stage model.
In the nutshell, investors need to decide whether to follow technical analysis or
fundamental analysis. Therefore, we need to determine whether the FTSE 100
markets are efficient. If FTSE 100 is weak form efficient market hypothesis, all the
historical information will reflect on the share price and analyst can't use technical
analysis to do the prediction. Analyst stating that FTSE 100 might be semi-strong
form efficient market hypothesis that reveal all publicly available information on the
share price and fundamental analysis can't produce any unusual return. Some of the
researchers claim that stock market is like random walk that analyst can't predict the
share price by historical data. Therefore, Malkiel (1999) is claim that there is no point
to do technical analysis and fundamental analysis because the stock prices reflect all
the available information that is relevant to the price. But some of the analysts claim
that there are some fund managers able to beat the market consistently by their stock
picking technique.
At last, there are many different opinion between practitioners and academics as to
how efficient markets and how useful stock picking and the market timing. For my
opinion, whether we choose technical analysis or fundamental analysis, we need to
determine the result by ourselves. There is no right or wrong answer on which
analysis we approach. In this project, the result for technical analysis and
fundamental analysis on Standard Chartered share is showing the sell signal, so the
investors who have the share should hold the share or sell it in the future.