Moving to A Frank Analysis

Hi Readers,

Given the limited capabilities of Blogger.com, I have decided to instead use Wordpress as my main blogging tool as it is a much better medium to use.

I have also changed the name of the blog to AFrankAnalysis.wordpress.com.

The focus of A Frank Analysis will feature a more journalistic and general view as to how global events effect business, economies and ultimately us...

click here on www.afrankanalysis.wordpress.com to view my frank analysis!

Many Thanks

Jian

Analyzing ASX: ANZ Using Technical Analysis pt.1

Today I'll be using technical analysis in analyzing at what price an investor should go LONG (Buy) on ANZ as well as patterns or days a chartist should look out for.

The first thing I do when analyzing ANZ is to zoom as far back as 3 years. In doing so, you can identify whether the stock has been growing at a healthy rate. This is also important to help identify MAJOR Support and Resistance levels as lines that take longer to form tend to be strong then those that have been recently formed.

So lets zoom out and see how ANZ has developed over 3 years (roughly) starting from 19 August 2008

At first glance, ANZ shows a sharp recovery from 2008's financial turmoil and peaks at October 2009 before stabilizing itself between the ranges of $20-$25.

When using technical analysis, the first thing you should always do is to identify REVERSAL days, that is the days when the share makes a 180 turn.

login to a charting software (www.prorealtime.com.en) and try doing it yourself and compare it to mine.

Once you have identified the reversal days, the next thing to do is to draw lines on them to identify the SUPPORT and RESISTANCE lines.

it should look something like this:

Looks very complicated, but what I have done is to link the reversal days to one another using lines! Wait a minute you must be thinking, at this rate you can be drawing lines all day long! Yes you actually can, but as you continually immerse yourself in the market, you can start identifying which lines are:

1) weak (those that wouldn't stand for long)

2)lines that you feel best suit the type of investor you are (riskier ones are the types who can tolerant higher variances; bigger swings in price movement)

3)lines that you feel are not necessary (matter of preference).

Upon closer observation, you'll see that the stock movement usually stops before the lines and:

1) Breaks past it

(this is usually dependent on the speed at which the stock is moving, the faster it moves, the more likely the line will break, the number of times the line has been challenged)

2) Bounces away from it

(hitting a wall and starts reversing, depends on how long the line has taken to form)

As you can see, technical analysis is quite relevant and reliable when identifying the future movement of stocks. Though it should be noted that technical analysis can sometimes fail as it is meant to be accurate only 60-70% of the time, which is why it is important to have a STOP LOSS system in place to avoid any investments from losing too much value.

The continuation of analyzing ANZ will feature ANZ in the time frame of 6 months.

The "Kiyosaki Approach" Adaptation to Financial Freedom

I am a keen reader of Robert Kiyosaki's writings as he explains how one can achieve financial freedom by transitioning from an Employee/Self-Employeed to a Businessman or an Investor by accumulating assets and maintaining budget discipline.

In understanding this theory, we first have to understand how the world makes its money from; and why an employee will not be as wealthy as a businessman or investor

The world has 4 types of income earners and can be split into 4 quadrants, The Employees, The Self Employeed, The Business owners and The Investors:

The employee makes money by working for a business,

The self-employed makes money by working for the business while thinking he is actually running a business,

The Business owner has a system in place whereby the employees oversee the function of the system,

The Investor makes money by using his money to make it work for him instead of him working for the money.

The reason why one can never be wealthy when being on the left side of the quadrant is simply because:

1) The more you work, the more your income gets taxed

2) You could get a loan for tax deductible interest payments but that reduction in tax payment is replaced by the loan payment (interest on credit card)

And Most Importantly

3) You're working for money while businessman and investors have money working for them; Money doesn't get sick, tired, bored, moody or frustrated while us human beings do, and when it happens, our capacity to receive income becomes compromised.

In other words;

The route to being wealthy and financially free is to have money working for you. This can be easily done by accumulating INVESTMENTS which will produce income. The stage whereby income from your INVESTMENTS > EXPENSES is when you have achieved financial freedom as you no longer have to work as the money you have spent to produce money will make the money you need to cover your active expenses.

While all this sounds simple and straightforward in theory (spend money to generate more money), how does one apply such logic to today's world when today's investments are so expensive in return for poor value? (a $100 house generating $5 per year; mere 5% return).

The key is to constantly SAVE! pay yourself before using the money for anything else! Set aside 10-20% and maintain that budget surplus.

The reason why saving is important is because you are saving to accumulate enough money to purchase an investment (house, shares) that will help support your active income (salary/wage).

When's the best time to buy these investments? When the market crashes! Thats when prices become extremely low as fear spreads throughout the market everyone is afraid and confused. When people are lost and lacking leadership, the most reassuring thing to do as a human is to follow someone's lead.

Which is why when market crashes occur, the gradient of the drop is often very sharp as when nobody is buying; prices fall fall and fall.

Taking advantage of this behavior among the masses is often creates new wealth as the house that was once worth $100 could now be worth $60-70 as the seller now has fewer potential buyers due to the market downturn or because rent could have gone down due to the market crash.

Market crashes have been reoccurring since the Dutch Tulips of 1649 as humans are at times irrational and emotional investors.

Given how often history repeats (the recent subprime mortgage being a testament to that) a wealthy person wannabe should aim to save up enough for the next crisis so that he too can be wealthy by taking the opportunity to purchase investments when they reach their low during a crisis.

A beginner's guide to Technical Analysis

In the realm of investing, there exists two philosophies to shortlisting investments,
Fundamental Analysis
Technical Analysis

Fundamental Investing is best defined as
"analyzing the financial statements, health, management, competitive advantages, competitors and markets of a given firm to decide the value of a firm"

while technical analysis involves:
"analyzing the movement of price and buying/selling volume to predict the direction of stock movement"

In today's post, I will be outlining the basics of understanding technical analysis with links to videos of "experts" showing you how its done. The reason why I have picked to present technical analysis over fundamental analysis is due to the relative ease to learning the basics of technical analysis as well as the widespread use by traders that trade everyday (*Day Traders) in addition to other reasons of which I will outline as I go.

An image that comes to mind when someone starts conversing about the stock market is more often than not, a line that traverses horizontally on a 2D plane like so:



An extreme Fundamentalist (Fundamental analyst) would use graphs as a way of proving that his analysis was correct for choosing a company that is undervalued.
However, the flaw with fundamental analysis is that it indicates when you should enter the market and not when you should exit. This potentially minimizes gains from capital gains (*Selling at a higher price) as a "correction in the market" (*when the market is overpriced and traders start selling) would erode the value of an investor's portfolio as there is no exit plan to capitalize on capital gains.

A Technical Analyst invests similarly to a poker player, he folds his invests when the cards are not playing to his favor but plays the hand when it is in his favor. While technical analysis predictions are not written in stone and can be completely wrong, there is always an exit plan to minimize losses. Disposing bad eggs and keeping good ones is how a technical chartist grows his investments.

Drawing Lines
to draw a line, connect a HIGH to another HIGH for RESISTANCE (*a line that Resists upward movement) or a LOW to Another LOW for SUPPORT (*a line that Supports upward);
here is an example:





lines can also be drawn horizontally by connecting key turning points in the stock price movement (*reversals: when a stock makes a 180 turn), eg.



As you can see, the stock movement is consistent with the lines drawn;
However, like all barriers and walls, lines too break down after being beat repeatedly or after being rammed by an object travelling at high speed (*the longer candles indicate growing momentum towards a direction) or by objects with higher weight(*days when news relevant to the company is published)

Now that you have a slight grasp of drawing lines, go ahead and give it a try on http://www.prorealtime.com/en/, just look for a company, and familiarize yourself with drawing lines!

HOMEWORK:
Go to youtube and look for FreeTradingVideos
Watch this everyday!
http://www.youtube.com/user/FreeTradingVideos#play/uploads/1/uITQueOWg2c
And you will see how the experts plot their charts

You can also access their website at www.freetradingvideos.com where you'll find a basic tutorial on how to get started on technical analysis.

Basics of Investing 101

The correction of the market over the past few months have brought up talks of purchasing value stocks, as well as fears that the market could yet dip again to the lows of a year ago; forming a double dip recession.

For all you first time investors or those of you who do not have an idea of what is going on, Here is a Basic Guide as to how you should approach the topic of investing:

Before you take the first step to investing, you must first be able to answer the 5Ws and be able to form a conclusion to support the position you should adopt for a particular investment.

What/Which? What should you invest in?
Why? Why should you invest in it?
When? When is the time to invest?
Where? Which economy/market/counter is ideal?
Who? Who should you listen to?

WHAT/WHICH
What should I invest in?
What sector/market/stock should I go invest in?

The answer to this question lies in understanding the basics of supply and demand as well as the direction both variables are heading. Additionally, understanding the background of the investment in question

WHY
Once you have determined the WHAT, you have to back your choice with WHY you should choose this one investment out of all possible investments. This choice must be backed with solid reasons to justify the direction you think the stock is heading.

WHEN
Upon answering WHY the next question investors should ask is WHEN,
In answering when, I believe WHEN is best answered using technical analysis as it provides a basis of expectation
However, industry expects have proven that timing isn't important as the markets in the long run have a history of going up

WHO
This criterion covers who you should pay attention to which can range from the Reserve Bank, financial ministers ,financial consultants of large fund managers; as these guys are the ones who will move and change the market conditions.

I will now try to make an example of this 5W concept in examining what kind of stance to take in regards to BP:

WHAT is the stock in question? What are some of the factors to consider?
BP has experienced a spectacular fall from 60 to 29 in a matter of 2-3 months, providing an opportunity for a value buy, or is it a trap?

WHY has BP lots so much value over 2-3 months?
This is attributable to potential oil revenue lost, and clean up costs, increased financial risk (BP downgrade in credit rating) which makes short fund raising more difficult, increased regulatory costs, and potential contingent liabilities such as
lawsuits

WHY should you consider this stock?
BP has 5bn in Cash Reserves and has committed 1.6 billion in to cleaning up efforts; a company with a huge amount of cash reserves have the solvency to ride through the tough times and recover for the next boom.
BP has a long history and has gone through many busts with each bust making the firm more efficient.

WHEN is the time to buy BP?
This is a matter of risk tolerance,
Historically, it is very tempting to dive into BP given its relative historical value.
However, one has to take into account that the business landscape BP used to operate in has changed and it now has added costs to its operations and it will take sometime until it reaches the $60s again.

WHO
The legislators
An extract from Obama's statement in response to the BP spill mentions 3 important points as to how they will respond:

A plan to legally force BP to set aside funds in an independently administered escrow account to cover claims by businesses and individuals.
Reforms at the Interior Department to improve regulation of offshore oil drilling.
A renewed push for energy legislation that reduces dependence on fossil fuels.

This is an important factor to consider considering how it will change how oil drillers operate.

Conclusion?
BP has 5bn in cash reserves and has used 1.6bn for clean up and may commit more,
we know that BP has the resources to weather this storm, and that oil prices are expected to go up when the global economy eventually starts gaining momentum, so we know that BP would be a safe option long term wise unless there is a new source of energy that can replace petroleum.
Keep a close eye on BP but exercise caution, it won't go bankrupt like Bear sterns, enron and lehman brothers did (or at least i doubt it will) but there is a high possibility of high volatility as traders continually try guessing BP's true value.
I expect this to continue until Bp finally plugs that hole, cleans up the coast and conducts a comprehensive damage assessment

The Start

Hello to readers of my blog,

I'm Jian a keen follower of technical analysis, the stock market and how to get rich books with dreams of being financially free.

My parents, my greatest teachers have always told me that the best way to remember what you have learnt is to teach it to somebody else.

This blog will live up to their words as I take on complex concepts such as the recent credit crunch, financial theories, business fundamentals and economics and churn it into layman terms for YOUR benefit.

I'm a keen believer that The World is a better place when you're rich, so lets get rich by learning together!

Jian