Finding Potentially Outperform Stocks with Technical Analysis and Bloomberg

MM Dandytra, CSA, CFTe

English Is Not My Mother TongueCFTe Lv.2 Exam

Today’s Subjects

The Foundation of Technical Analysis

Outperform – Underperform

Relative Rotation Graph

Tom Dorsey’s Method

Ratio Chart or Relative Comparison Chart or Relative Strength

“Perfect” Technical Analysis Indicators

Relative Comparison with Bloomberg Portfolio Charts

Technical Analysis

Technical Analysis

John J. Murphy

• “Technical Analysis of the Financial Markets”• The study of market action through the use of chats for the

purpose of forecasting future price trends

Martin J. Pring

• “Technical Analysis Explained”• The art to identify a trend reversal at a relatively early stage

and ride on that trend until the weight of the evidence shows or proves that the trend has reversed

John D. Magee and Roberts D. Edwards

• “Technical Analysis of Stocks Trends”• The science of recording in graphic form the actual history

of trading and then deducing from that pictured history the probable future trend

The Use of Technical Analysis

Technical Analysis

Trend Analysis

Timing Analysis

Price Analysis

Investment Strategy

Decision & Action

Technical Analysis “Branches”

Technical Analysis

Classic

(Chartist)Modern

(Indicators)

Technical Analysis

Technical Analysis

Basic Theory

Dow Jones Theory

Trend Analysis

Supply Demand

Line Analysis

Support Resistance

Trendline

Channel

Price Pattern Analysis

Candlestick

Bar Chart

Gap Analysis

Chart Pattern Analysis

Reversal Pattern

Continuation Pattern

Hybrid Pattern

Volume Analysis

Spesific Theory

Elliot Wave

Gann Method

Fibonacci Method

Indicators

Indicators

Indicators

Momentum

Stochastic Oscillator

RSI

Trend Following

Moving Average

MACD

Volume

On Balance Volume

Volatility

Bollinger Band

Average Trading Range

Sentiment

Market Breadth

Advance Decline

Quantitative Methods

Standard Deviation

Linear Regression

Line

Technical Analysis’ Premises

Price Discounts Everything

Insider Trading (or Speculation) always occurs

Semi – Strong Form Market (Market Data and Public Information are available)

Price Moves in Trend

Price movement is not random

Random Theory is wrong

History Repeats Itself

What has happened will probably happen again

There are certain patterns or cycles

Technical Analysis Chart

Outperform - Underperform

Why Investor Trade / Invest in Stocks

Dividend

Capital Gain

Exceed Cost of Capital

Inflation

Free Risk Interest Rate

Internal Required Return

Exceed certain Benchmark

Market

Other Index

Exceed The Benchmark

Earn bigger Gain than JCI

21 Sept’12 – 31 Okt’12

ADHI +53% vs JCI 2%

Experience Loss fewer than JCI

8 Agus’11 – 29 Sept’11

ASII -2% vs JCI -8%

Record Gain even when JCI falls

25 Apr’12 – 31 May’12

ACES 22% vs JCI -8%

ADHI

ASII

ACES

So …

Outperform means Exceed Benchmark

Earn bigger Gain than JCI

Experience Loss fewer than JCI

Record Gain even JCI fall

Underperform means Not Exceed Benchmark

Earn fewer Gain than JCI

Experience Loss bigger than JCI

Record Loss even JCI rise

This seminar aim to help you findstocks that will Outperform JCI andalso your Portfolio Basket usingTechnical Analysis and Bloombergtools

Tom Dorsey Method

Who Is He ?

Co-founder of Dorsey, Wrigth & Associates (DWA) in 1987, an investment firm in Virginia, U.S

Fund Manager whose funds often beat market by using Technical Analysis method

How They Do That ?

Using Point & Figure Chart and Relative Strength to maket their funds Outperform

Relative Strength of :

Stocks and Index

ETF and MSCI

Certain Index and Index Basket

Divide the numerator (stock) and the denominator (index) then convert it into Point and Figure Chart

Point and Figure Chart Analysis

Point and Figure Analysis mostly is Chart Pattern analysis (and a powerful one)

However, the most difficulty in conducting Point and Figure Analysis is user must find a correct “Box Size” and “Box Reversal”

ASII in Point and Figure Chart

Why are we talking about Dorsey ?

Tom Dorsey and DWA proves that Relative Strength method can be useful in order to find stocks or ETF that Outperform market

Relative Strength is not necessarily have to be in form of Point and Figure

Relative Strength can be in other Price Pattern such as Candlestick and Line Chart

Relative Rotation Graph (RRG)

What is Relative Rotation Graph (RRG) ?

A method created by Julius de Kempenaer and developed by Trevor Neil

Available in Bloomberg since 2011 RRG <GO>

A new method that Proof Instruments are Rotating (similar with Cycle analysis)

RRG can also be used to find Instruments that are Outperforming and Underperforming as well as Rising and Falling

The Appearance of RRG

4 Sides of RRG

IMPROVING (Rising but

Underperform)

LAGGING (Falling and

Underperform)

LEADING (Rising and Outperform)

WEAKENING (Falling but Outperform)

How to Use RRG

Choose your Risk Profile and Match it with your Strategy

Then choose stocks whose Sector is in your preference Sides

Suggestion :

Long Term Investor : Lagging Sides

Medium Term : Improving Sides

Short Term Trader : Improving or Leading Sides

What is “wrong” with RRG ?

Technically Speaking, RRG Chart is not a normal Technical Analysis Chart

Still need a deep research to study how Instruments rotate from Side to Side

Until then, Technical Analysis method should not be applied

However, RRG is a great Coincident Indicators but should not be employed as Leading Indicators

Relative Strength

3 in 1

Relative Strength

Relative Comparison

Ratio Chart

Ratio Chart of ADHI and JCI

Ratio Chart of ASII and JCI

Ratio Chart of ACES and JCI

Ratio Chart of AB

Ratio Chart of AB = Divide A with B

If AB Ratio Chart Rises (Outperform)

A is Better than B

Buy A and Sell B

If AB Ratio Chart Falls (Underperform)

B is Better than A

Buy B and Sell A

The Original Use

Relative Strength in Technical Analysis is used by John Murphy in conducting Intermarket Analysis

Relative Strength helps us to find Instruments that are Performing better than other Instruments

Relative Strength is used in Asset Allocation Strategy

Relative Strength in Bloomberg (Ratio Chart)

Steps

Using function G <GO>

Create New Charts

Ratio Chart of ASII and JCI Index

Ratio Chart of CPO and Coal

Ratio Chart of JCI and Dow Jones

Ratio Chart of Gold and U.S Gov. Bonds 5Yr

“Perfect” Indicators

What is “Perfect” ?

Ask Them “Is There A Perfect Weapon / Tools ?”

“Perfect” means ...

You understand “It” so much that you are able to maximize “Its” advantages and minimize “Its” disadvantages

You choose “It” under every circumstances, even if you have another options

“It” is the only thing / one that you Trust

Holy Grail

Holy Grail is a method (indicators, system, technique, etc) that give you 100% accuracy, 100% consistent profit and 0% loss

Holy Grail is not exist !

There is no Perfect but there is “Perfect”

“Perfect” Indicators means ...

Indicators that you understand so much that you can Maximize its own Advantages and Minimize its own Disadvantages

Indicators that you use for Buy and Sell Signals … but then you know which are the Best Buy and Sell Signals … and still you are okay if you make wrong actions because of those so-called “Perfect” Indicators of yours

Technical Analysis’ Indicators

Indicators

Momentum

Stochastic Oscillator

RSI

Trend Following

Moving Average

MACD

Volume

On Balance Volume

Volatility

Bollinger Band

Average Trading Range

Sentiment

Market Breadth

Advance Decline

Quantitative Methods

Standard Deviation

Linear Regression

Line

My Recommendation

I believe the best Trading activities lies in Medium Term Trading; not Short Term Trading or Long Term Trading (Investing) Based on Risk – Reward and Holding Period. MT offer

Higher Profit than ST and Faster than LT

Investor and Trader can employ Medium Term Trading

Medium Term Trading in my Technical Analysis concept can be translated into : Buy when Momentum Indicators is Oversold while Trend

Following Indicators is Bullish

Sell when Momentum Indicators is Overbought while Trend Following Indicators turns to Bearish (from Bullish)

That would be : Buy Low – Sell Higher

My “Perfect” Indicators

Bollinger Band Stochastic Oscillator

Type :

Trend Following Indicators

Volatility Indicators

Quantitative Indicators

Purpose :

Trend

Overshoot – Undershoot (based on Statistical Method)

High – Low Volatility

Type :

Momentum Indicators

Purpose :

Oversold and Overbought reading

Timing to Rise or Fall

Moving Average

Moving Average is an averaging method that ‘move’ periodically so it is always the latest average

MA20 means average 20 days ago Since 20 days represents a month, MA20 could also

mean Monthly Average

If Current Price is above MA20, technically speaking it means Bullish It’s Bullish because Current Price is above Monthly

Average

Similar parable : MA20 with MoM Rise or Fall, MA60 with QoQ Rise or Fall and MA200 with YoY Rise or Fall

Bollinger Band

Bollinger Band is a Standard Deviation of its Moving Average Standard Calculation of Bollinger Band is 2SD and -2SD

of MA20

Statistically Speaking, if Price is below or above 2 (and -2) times its Standard Deviation then it is beyond ~95% of overall range (normal distribution) that’s what I called Overshoot and Undershoot

If the range between 2SD and -2SD is widening then the volatility is high, vice versa

Similar Bollinger Band method often used in PE Band and PBV band

Stochastic Oscillator

Stochasic Oscillator reads how close Current Price to its extreme certain period range

How close is Current Price to (say) 20 last days range of highest or lowest range

If Current Price near its Highest Price in 20 last days then Stochastic Oscillator read an Overbought

If Current Price near its Lowest Price in 20 last days then Stochastic Oscillator read on Oversold

Often, you don’t need to see Stochastic Oscillator to prove if it is Overbought or Oversold based on Stochastic Oscillator method

The Appearance of My “Perfect” Indicators

Stochastic Oscillator Modified

Full Method of Bollinger Band

Relative Strength with Technical Analysis

Recall : Ratio Chart of ASII and JCI Index

Ratio Chart of ASII and JCI Index

Ratio Chart of BBCA and JCI Index

Ratio Chart of BBCA and Finance Index

Ratio Chart of Property and JCI Index

The Portfolio Maker

Bloomberg Features

CIX <GO>

Main menu in order to create index

CIXB <GO>

Easier menu to create our own index

CIX is able to create historical Chart based on the securities and weighting method (Personal, Equal or Market Weigth)

Cement Index with CIXB <GO>

Cement Index Historical Chart

Portfolio Charts

Making Your Portfolio with CIXB <GO>

5BIGS : ASII, BBCA, TLKM, UNVR and PGAS

5BIGS (Your Portfolio) Historical Chart

Attention

Historical Chart of Portfolio assumes that the weighting are consistent with the weighting that you input in CIX <GO>

That seems not applicable but then we are looking at the future

Assumes that the weighting will not be changed in the future

Ratio Chart of Portfolio Chart

What is that ?

The idea is to combine Relative Strength method with the Amazingness of Bloomberg which can create a Portfolio Chart

We can try to Outperform certain index then why can not we choose Stocks in our Portfolio that could Outperform our Portfolio itself using Relative Strength and Technical Analysis (and Bloomberg)

Ratio Chart of ASII and Your Portfolio

Ratio Chart of TLKM and Your Portfolio

Finding Stocks That Potentially Outperform Index or Portfolio

BBCA and Your Portfolio

PGAS and Your Portfolio

Conclusion

The Main Steps

Create your Portfolio and Portfolio Chart with CIX <GO>

Form a Ratio Chart from Stocks in your Portfolio and Portfolio Charts

Apply Technical Analysis to find which Stocks that will Outperform Portfolio Charts

Another Bloomberg Features

You can look deeper you CIX Chart (Portfolio Chart) with SEAG <GO> to see how your portfolio react throughout the time (historically speaking)

If you create many CIX Charts, you can do Screening with EQS <GO> Which CIX Charts (Portfolio Charts) that are Oversold or Above

Middle Bollinger Band

You can also do General Check Up your Portfolio using PORT <GO> Is your Portfolio have too much Property stocks or your

Portfolio P/E is above P/E of JCI

“Backtesting” feature can be used to find what Indicators (and their parameters) which fit the best for your Portfolio Chart

Any Questions ?

Muhamad Makky Dandytra, CSA, CFTe

Working Experiences

Currently as Junior Investment Manager at Mandiri Healthcare

3 year as Technical Analyst at Trimegah Securities, AmCapital Indonesia and Anugerah Securindo Indah

1 year as Equity Sales at Danareksa Sekuritas

Certifications

Certified Financial Technician (CFTe) from IFTA

Bronwen Wood Award 2011 from IFTA

Certified Securities Analyst (CSA) from SASB Indonesia

mmdandytra@gmail.com

(+62) 813 145 45 317

Contact Information