How Charts can help in determining entry price

We have noted that the monthly MACD is poised to hook up for the KLCI (here). As discussed previously, this is a very reliable indicator that the market has bottomed & an upturn could be around the corner. Many investors are under-invested in the market & have been hoping for some correction in order to move into the market. Yesterday, I have posted that the market may have put in a bearish reversal (here). If the reading is correct, then the time to accumulate stocks may be coming soon.

Assuming that you have made a list of stocks to buy (hopefully, they are fundamentally good companies that are trading at attractive valuation), then let's use technical analysis to pinpoint a good entry level. Let's say, the stock that you like to buy is TA Enterprise Bhd ('TA'), a stockbroking firm that would naturally benefit from increased trading volume in a more bullish stock market. In addition, you may have read that TA is planning to spin-off its property arm, which could be the catalyst for a re-rating of the stock.

You may want to confirm that the monthly MACD has hooked up for TA. If you have the charting software, you can easily do it. If you do not have the necessary software, then you may use the next approach- see whether the stock has crossed above its 200-day Simple Moving Average ('SMA').


Chart 1: TA's monthly chart as at 29/4/2009_12.30 noon (Source: Quickcharts)

To check whether the stock has crossed above its 200-day SMA, you can use the web-based free charts provided by Tradesignum.com. I have re-produced this chart below. We can see that TA has in fact crossed above its 200-day SMA. If you zoomed into the recent price movement, you would see that TA had a very sharp move which may not be sustainable. If you think otherwise, you may position to buy at either the recent reaction 'low' of RM0.76 (recorded on April 20 & 21) or the 20-day SMA of RM0.74. However, if you are less gung-ho & very patient, then you may position to buy at around the 100-day SMA & 200-day SMA (i.e. about RM0.65-70). The lower the target entry price, the lower will be the probability that you getting your stock. But,if you do get it, then the lower entry price will give you higher return.


Chart 2: TA's daily chart as at 28/4/2009 (Source: Tradesignum.com)

I have chosen TA for analysis because it has a recent bullish breakout of a very clear downtrend line. Other stocks may not have such a distinct price trend. One of the most reliable method of stock selection is the trend-following method. I find that using multiple moving average lines would easily enable one to use the trend-following method. For example, you may buy when the 50-day SMA has crossed above the 100-day SMA or the 200-day SMA. Similarly, you may sell when the 50-day SMA has crossed below the 100-day SMA or the 200-day SMA.

If you try out with different stocks, using Tradesignum (for period or data range of 10 year & overlaid with 20-day, 50-day, 100-day & 200-day SMA), you may agree with me. It is a very profitable & easy method to adopt. Good luck.