Tag: technical analysis

Many technical indicators boil down to a handful of unique variables


Dr. Brett Steenbarger at Traderfeed:

The bad news is that the many technical indicators out there really just boil down to a handful of unique variables. The good news is that, overall, these unique variables do possess statistically significant predictive validity with respect to the prospective movement of stock index prices. The challenging news is that even this significant predictive value leaves the lion’s share of the future movement of stock index prices unexplained.

Source: The Psychology of Quantitative Analysis

What does the chart say?

A new piece of academic literature argues that if you are an individual investor trading options on the basis of technical analysis, you have made some very poor decisions. The researchers studied Dutch discount brokerage clients for the period 2000-2006. The key take-away:

Technical analysis costs investors on average approximately 50 basis points per month in raw returns from poor portfolio selection decisions, and 20 basis points from additional transaction costs. Notably, the impact of technical analysis is concentrated among high derivative rollers, where the costs are much higher: 140 basis points in raw returns, and 29 basis points from additional transaction costs.

That translates to a cost of about 8.5% a year for normal traders, and about 20% a year for high rollers.

We had also linked to studies in the past that looked at specific signals. For example, Adam Grimes ran Fibonacci ratios through the grinder. His conclusion: mathematically it does not make sense for traders to use Fibonacci retracements when trading.

When you put these two studies together, it leaves us with an interesting question: why bother with technical analysis when a) it doesn’t work in the aggregate, and b) one of the most popular charts, Fibonacci ratios, have no statistical basis in fact?

In a recent interview with Josh Brown, technician Greg Harmon had this to say:

Most traders or investors that criticize technical analysis do so because they assume that the result of the analysis is a roadmap, a direction with certainty. It is nothing of the sort. Technical analysis is about the possibility. Technical analysts and traders will draw all sorts of lines and spout off support and resistance levels that appear to be full of certainty. Their analysis is not about identifying points of certainty but rather points of reflection, where price history has shown a price level important and so might make it important again. Might.

In my mind, looking at a chart is a bit like getting a “hall-ticket” pooja done at the Ganesha temple before the exams. You know you have studied hard and done your home-work, but if not-pissing off the Gods costs just Rs.100, you might as well get that done too.



Jaiprakash Associates [stockquote]JPASSOCIAT[/stockquote] has been the darling of stock market speculators for a while. The company can be best described as an infrastructure conglomerate that is into everything from mining to power production. The last couple of years hasn’t been kind to infrastructure companies in general and JP is no exception. Since Jan this year, the stock is down -29.44% compared to Nifty’s -4.53%

JPASSOCIAT technical chart

As you can see from the chart, the stock has long-term support at Rs. 60 levels (off which it bounced off recently) and resistance at Rs. 80 levels. Just yesterday, the stock saw a bullish 4×9 Cross-Over. RSI levels at mid-40s and an imminent MACD signal-line cross-over are supportive to a bullish outlook as well.

JPASSOCIAT - Jaiprakash Associates Limited - Quarterly Results

There isn’t much to write home about from a fundamental point of view. Most recent 4Q EPS is around 3.11 and it barely made it past the finish line in the Oct-Dec 2012 quarter. Dividends are meager and the stock is currently trading at a PE of around 22. It has a beta of 2.12 which is one of the highest that we track. Clearly, JPASSOCIAT is not for the faint of heart.

All said, JPASSOCIAT is good for a short-term trade. Buy it at Rs. 60 levels and sell it once it hits Rs. 80. For the long-term, wait for clarity in policy direction before making a bet on infra stocks.

Analysis: RELIANCE

Reliance Industries [stockquote]RELIANCE[/stockquote] has been a permanent disappointment since 2005 and this year has been no different. The stock is down 7.46% compared to the Nifty’s 5.35%. The stock just doesn’t seem to have the zing in spite of the bonus in 2009, the more than Rs. 8/share in dividends and stock buy-backs.

Reliance chart

After breaking its up-trend line, the chart shows that Reliance is headed towards its most recent support area at Rs. 770 levels. RSI at mid-20’s is basically plumbing the depths at this point – the stock has bounced whenever it has seen such dire readings. However, just about every other technical indicator is bearish. Its 18-day SMA cut the 9-day SMA; Aroon is bearish; MACD histograms are not helping either.

The company remains a cash machine. So much so that Mukesh Ambani is using to enter pretty much all sectors of the Indian economy. It looks like by the end of this decade, Reliance will be dabbling in everything from telecommunications to power to banking. So even though Reliance is classified as a petrochemical major, its undergoing a transformation into a wide winged conglomerate.

The stock, however, is not cheap. With a PE of 12.84, it is trading above other oil multinationals like Exxon (9.30) and Total (7.83). It has a sub-market beta of 0.86 which could have been good news except that its Bull & Bear betas are skewed towards the downside.

RELIANCE - Reliance Industries Limited - Quarterly Results

To conclude, we are a short-term BUY on RELIANCE. We expect a bounce off these over-sold conditions and a support at Rs. 770 levels. The long-term is a bit hazy. The company is at risk of losing focus by spreading itself too thin on vanity projects and blowing away its cash-hoard on capital intensive projects with low returns and intense competition.

Analysis: JSWSTEEL – To Catch A Falling Knife?

The entire steel sector has taken it on the chin lately and JSW Steel [stockquote]JSWSTEEL[/stockquote] is no exception. After making a 52 week high close to Rs. 900 levels, the stock has seen a one-way hammering all the way down to Rs. 600 with its all time low of Rs. 566 in sight.

JSWSTEEL analysis chart

The question on everyone’s mind is when is the slide going to end? It is trading at a PE of ~6.8 while its most recent quarter EPS was 5.76. Also, JSW paid a dividend of Rs. 7.50/share last year and Rs. 12.25 before that. JSW was never a profit engine – historically, net profit and margins have not been that great.

JSW Steel Quarterly results

As you can see from the chart below, RSI at 20 is showing extremely oversold conditions. However MACD is not confirming RSI.


Should you catch this falling knife? The answer is wait a while before you take the plunge. With a beta of 1.71, it is pretty volatile and given a choice between JSWSTEEL and TATASTEEL [stockquote]TATASTEEL[/stockquote], I will take Tata Steel for its global footprint and profitability any day. However, keep a close eye on JSW, a good bargain might just be around the corner as the stock races towards its 52 week lows.