Friday, March 30, 2007

Forward Test: Redtone


Ben told me that Seng from Fusion Investor asked about Redtone from TA perspective.
So I decided to dedicate a whole post to it and label it Forward Testing.
Let's see if the market acts like the way I predict it or not. Remember, we make a prediction, but let the market decide. Should the market decide our prediction is wrong, as a TA practitioner, we must concede defeat and accept that the market is always right. You cannot win against 100 people pushing you down, no matter how strong you are.

Redtone
First we look at the weekly chart - overview.
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We see bloodshed happenned in 2006. We see that in 2007, it tried to recover but so far to no avail. Volume remained thin throughout with the exception of 2007 where the long green candle marks the jump in price supported with volume. However, we also see a blue line drawn by me, marked as resistance. The blue line, resistance, was not successfully taken, and price falters with volume.


Next we take a closer look - still the weekly chart - zoom.
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We note, EMA 50 (pink line) is still above EMA 20 (orange line). This is bearish.
We also note that the last candle rests slightly above EMA 20 weekly chart. This we note as Key support. Further assault on this support would be unthinkable.


Let's now look at Daily Chart - overview
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We note that the last candles are now resting on near previous highs in November 2006, December 2006 and January 2007. Previous resistance now has become a support. This would jive with the statement above from Weekly chart that the stock is now at the Key Support. Further assault on its Key Support, would be fatal.


Let's now look at Daily Chart - zoom
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This one is interesting.
First, we have long green candle with high volume.
Next candle is a shooting star with high volume.
Following is the bearish engulfing. Though volume is not as high, we must take this as a confirmation that the previous candle is a shooting star indeed.
Follows is another assault - red candle.
Following day, counter opened lower, intraday wise, reached the EMA 50(pink line) but it managed to close slightly above the previous day's closing. This is the Piercing Pattern. Piercing patterns are bullish reversal patterns.
However, the following day, while the counter opened higher, it closed lower. This cannot be regarded as a confirmation to the Piercing Pattern. While it close above the previous day's closing, the open high, close low is always a negative signal. If the bullish sentiment exist, why would a stock open higher to close lower?

This was proven true with the two red candle days. However EMA 50 held.
The following is a green candle that forms a Harami pattern.
However, the following Red Candle does not confirm it, and forms a Dark Cloud Cover.
However this is also not confirmed with the following Green Candle.
And this is followed by a Red Candle.
This is what was described in Steve Nison's books that a reversal does not necessarily happen with Harami, Dark Cloud Cover, Piercing Pattern, Bullish/Bearish Engulfing. It could merely move in sideways.

Thereafter, a sudden breakout occurred. Long Green Candle.
But proved to be a false breakout with the appearance of a Dark Cloud Cover.
The next two candle showed that the counter tried to recover but this is all in vain.

Resistance is futile. Marked with Blue Vertical Line, the Bearish Engulfing on a High Volume marks a whole new beginning to a downtrend of the stock.
Further assaults were made on EMA 20 support (Orange Line) and now the EMA 50 support (pink line).

While the assaults are with low volume, it does not mean that the downtrend is not real. From my personal observations, a rally with low volume is unsustainable. But a downtrend with low volume is very real. Volume could not be used in the same manner to analyse the uptrend and the downtrend. A counter with low volume downtrend, slowly drifts into the death of the stock. OK, I was being dramatic. It drifts and it drifts, until distribution is over.

Conclusion:
The charts look bearish. The general condition of the chart is bearish. Yes, while I use a total 14 indicators, they were all removed from the chart, save the EMAs :P. But, price volume action is the originator of all indicators.
So, general condition is bearish, Redtone is now at its key support point. Any confirmed break on this support, would confirm that we re now looking at the beginning phase of another distribution.


Standard Boring Disclaimer
The above is the personal view of the author based on Technical Analysis. The author disclaims all responsibility whatsoever on the course of action that may be taken.
Also, take note that the author is merely an accountant by profession, previously an investor and now a trader. He is not licensed to give any stock advisory services.

8 comments:

Seng said...

Hi Max,

Thanks for the post. Nice. I like your methodical approach, starting from the longer term first, and then zooming in closer.

Actually, I haven't done an FA analysis like the one I did for HEXZA yet. A quick scan showed that it seems to be valued fairly. Market cap $166M, H1/07 earnings $5M, annualized, say $10M, suggesting a P/E of 16 at $0.66. A director seems to have made 2 significant disposal on 12/3 (0.75-0.9?) and 20/3 (0.75?) - my quick guess is he's trying to do some profit taking after Feb 22 price run-up, but haven't analyzed in detail. What attracted me was ICap's Buy call with a target price of over $1, although for the longer-term. I think to get above $1, it needs to show some good earnings results first.

Having said that, the reason I chose REDTONE is mainly trying to learn more about TA. I'm interested to see if TA can enhance / widen the range of my trading ability, since from my personal FA approach, I would normally pass REDTONE as an opportunity (my portfolio P/E is less than 9). I expect to be wrong on REDTONE but wanted to stick my neck out and try it anyway. I believe the best and fastest way to learn, is to make as many mistakes as fast as possible (whilst keeping the cost of one's mistakes as small as possible) :D

I agree with most of your TA analysis based on my understanding so far. However, what I couldn't resist is that historically, when both RSI and Stochastic RSI are in Oversold conditions, it indicates that the stock has reached very close to bottom. E.g. Dec 14 and Feb 7. As of Friday, both RSI and Stochastic RSI are now in the same condition, suggesting that maybe, the stock is close to reaching its bottom. But as Ben said, that doesn't necessarily mean that the stock will rise soon - distribution could take place, it might be short, it might be long, basically, we just don't know yet. Again, historically, there is upside within days to a fortnight. I suppose if REDTONE was a compelling value stock, then, I don't mind entering now in a large way, but since it seems to be fairly valued at $0.66, I suspect to win at REDTONE in a significant manner would imply that it's best to wait until the TA indicators shows a complete reversal, plus signs of upside starting. I suspect this might be the better approach than bottom fishing for a fundamentally fairly valued (as opposed to extremely compelling) stock.

Anyway, many thanks again for the write-up. To reinforced my learning, I actually bought a minimum position in Redtone last Friday at $0.66. So, I have now forced myself to monitor REDTONE at least once every day, to maximize learning potential :-)

Cheers,

Trader Max said...

Ahh, life's getting more interesting with interesting comments :)
I see you have also checked that a director has disposed its shares. Thanks for the information. Personally I dislike it when the directors dispose their shares. You might want to check whether its a net disposal or a net acquisition.

ICap looks at longer term. So, if you re looking at longer term, then I supposed any downturn will be a noise to you. Insignificant.

I never liked the fixed number approach for applications of oscillators like RSI or Stoch. Or I used to like them until I paid 20K as tuition fees in total for various counters. The pain is still not forgotten. :(

Also, your dates - Dec 14 and Feb 7 , we re looking at different market condition in my opinion. If you like, you could further use TA to analyse NSCOM and Courts in 2006. And make a comparison. I dont like what I see there though.

ADX. Its use is to measure the strength of a trend. It disregards whether its an uptrend or downtrend. ADX rising - sure. Price action however is down. This in TA terms, would mean that the downtrend is strong. I dont like it.

You re right to say that to win at REDTONE in a significant manner would imply that it's best to wait until the TA indicators shows a complete reversal, plus signs of upside starting. I suspect this might be the better approach than bottom fishing for a fundamentally fairly valued (as opposed to extremely compelling) stock.

Why pick the bottom? Its almost impossible to do it. And risky as hell too. But of course, if you master this, then the returns are superbly unbelievable.

They say, only fools learned from their own mistakes. I dont know. I think mistakes are inevitable. And it helps the learning process more. Each time I pay tuition fees, I remember the pain and told myself never to violate the rules. Each time, it brings me closer to following the rules.

A friend of mine once said about life, "Sometimes, the danger is not losing, but winning." What he meant, if in the context of trading/investment is, if one makes money despite violating the rules, then it is mere luck. He may be lucky 9 out of 10 times. But the 10th time, will wipe him out.

Good luck with this one.

Seng said...

Hi Max,

Many thanks for sharing your views. I'm glad I chose this example where we have different opinions - hopefully, I'll get to learn faster :-)

Firstly, let me assure you that my recent Redtone purchase is insignificant - in the worst case scenario, I don't expect Redtone loss to shave more than 0.1% of my gains this year. To me, that's an acceptable tuition fee. But I still buy Redtone because in real life, I'm a thrifty person (what else can one expect from a fundamental value investor? :-) ) - even a $50 loss / loss of brokerage will be imprinted deeply into my memory ... I appreciate your concern, it's good to clear this up, and I hope you will allow me to probe deeper into your technical mind, to better understand the way a TA thinks.

You mentioned ADX:
1. Yes, there is an uptrend in the last 4 days (indicating increasing strength in the last 4 days trend).
2. Yet, at 26, it still seem to be in a neutral zone (at least, it seems to me - not sure if I'm right here) ...
3. The last 3 days price looks flat (although possible window dressing on 30/3 distorting?). Combined with 1., is the ADX confirming that going forward, price is likely to trend sideways?
4. Over last 12 days, price is clearly downtrend, yet ADX over the same period was flattish suggesting an unclear downward trend? (Am I misinterpreting ADX here?)
5. Could that be a possible divergence which the ADX is trying to indicate, i.e. we're likely to see sideways trading soon?

Logically, either I'm misinterpreting ADX (I don't mind being corrected here), or, you must be relying on some other factors (which I hope to hear). I hope to better understand that, if possible.

To me, the only reason why I think Redtone could go downwards is because of the candlesticks in the last 12 days... it is clear from candlesticks that we are still in a downward continuation trend, but when I look at the TA indicators, they are really conflicting (e.g. Slow Stochastics, RSI, Stochastic RSI all 3 suggests buy, whereas ADX suggests sideways).

If anyone asked for my recommendation, I'd say wait, because candlesticks and volume appears to contradict TA indicators, and it's better to wait for confirmation. (I wonder if you derived your opinion mainly from this, rather than from TA indicators?)

Sorry if I seem persistent. I'd buy you coffee if you are living in Penang ... :-)

Cheers.

Trader Max said...

Dear Seng,
As an accomplished investor like yourself, I m sure you would have ensured that tuition fees, if any, would be minimal. I m not worried at all. Haha.

Persistence? Hey, I welcome it. You have no idea how persistent I am. I m probably more guilty than you. I believe that persistence is one of the key pillars to learning. Let us both learn more ;)

Yes you re right about candlestick showing a downtrend. And you re also right about indicators now showing flatly oversold condition. This is also what we call positive divergence - when indicator flat but price falling. As a matter of fact, you might also want to look at Cash related oscillators like MFI. It measures if cash is going in or going out.

Parameters/settings plays a major role. Your setting, I believe is the default Metastock setting. Hence what you see and what I see is different. Mine is a shorter term system designed for traders. The MS setting would be a more medium term one.

One problem with oscillators is that in a bear market, it an stay oversold for a long time. And vice versa. There could be a rebound play, or sideway action - hence what you see - the positive divergence.

However, I am more of a trend follower. I prefer to make quicker gains by riding on a start of a confirmed trend. Faster gain, lower risk. Hence I would really not recommend this stock.

Judging from volume also, this is not encouraging. I dont like it.

Hope it explains :)

Seng said...

Hi Max,

Thanks for your kind and patient answers. Yes, it explains a lot.

1. Risk control. I suspected successful traders practice risk control by cutting losses short and following the trend for as long as possible. Until I started learning TA, I've always had this (wrong) preconception that the traders way is risky, but judging from your response, you are always focussed on high probability trades, and select your trades carefully. Despite Redtone presenting nice TA indicators, you are not willing to trade yet due to conflicts from candlesticks and volume (and possibly other indicators). OK. It all boils down to risk control, similar to fundamental investors - I control my risks in other ways, (e.g. HEXZA), but same principle - the goal is to minimize downside risks, and ride the upside as much as possible.

2. Yes, I use default settings. Yes, what you do makes sense, within the context of risk control - you need a faster indicator that can pick up the upside sooner, rather than later, to maximize gains.

3. Yes, that's what I also noticed with oscillators - sometimes, they stay oversold for a long time, sometimes not, and it's hard to know how long the current oversold will last. So, what I'm gathering is that one needs to give priority to candlesticks and volume first, and then, when those look right, then consider the indicators. In other words, the indicators are used to select higher probability trades, i.e. it restricts and reduces the number of potential trades even further than raw candlesticks/volume method gives.

4. MFI. This seems neutral. It's fairly flat, trending downwards slowly, but faster in last 3 days... looks like there might be a divergent with prices flattish in last 3 days (most likely due to window dressing). Hmmnn ... seems like this one is consistent with candlesticks. But MFI is now at 58, i.e. neither top nor bottom (although leaning towards top), but I have to say this one is "No Go". So, I now have 3 "go" indicators, 1 sideways and 1 "no go" (MFI) for Redtone. Plus candlesticks and volume says
"no go".

5. I'm also looking at MACD (standard setting). MACD line is still below signal line (i.e. "No Go"). MACD trending down and dipped below zero (i.e. "No Go"). There's no divergence there compared to prices (ignoring likely window dressing in last 3 days). Guess MACD is another "No Go".

Looks like too many "No Go's" here. I now suspect with 67% chance that you and Ben are more likely to be right than wrong ... if I make a loss on this one, I think I'm going to be happy, coz at the start, I thought Redtone looks cheap after falling nearly a third of its price, but now, I'm starting to understand that the chance of the price falling further is still there ... if I lose money on this one, I'm sure the lesson will be imprinted forever in my mind ...

I know "hope" has no place in a trader's vocab, but let's see how things turn out.

Thanks for your kind patience again.

Get well soon! Cheers!

Trader Max said...

Excellent!!! From your post, I could see that my efforts in replying is worth it :)
There are several rules that a trader needs to have to mitigate risks. I shall be posting that later :)
There is always a probability that the market does not move in accordance to our predictions hence, a trader need to see that and concede that the market is right and act accordingly.
This however, is easier said than done. And this, is what differentiate a great trader, a good trader and a mediocre trader.
Its not the knowledge of TA. Its emotional control, discipline and money management.

zewt said...

i am going to whack that counter tomm ok?

Ben Gan said...

Tops and bottoms are never known until they are formed. Hence, we should never attempt to sell at the top nor buy at the bottom.