To start, the Philippine Stock Exchange index closed just a little point above the 6,000 level yesterday. Many people again are questioning and asking if our bullish stock market is in the bear (down) market stage?
To answer the query, I will give my fundamental and technical view of the market.
Fundamentally, the Philippine stock market has still a lot of upside due to the economic achievements like the credit rating upgrades and sustainable economic growth. Although we face an adverse situation with Yolanda crisis, our economy is still intact and the Christmas season is around the corner! With OFW remittances and BPO business hit their respective highs any disaster will have a little impact on our financial markets.
Technically, we still need to confirm this by using several technical analysis (indicators) tools.
There are numerous types of technical analysis in the financial market, but I will focus on the Elliot Wave, Relative Strength Index (RSI) and Moving Average Convergence (MACD). For beginners, these indicators may sound to technical and to better understand them, I will give a brief overview as follows:
Elliot wave - the theory suggest that the market moves in a series of up waves (5 points) and down waves (3 points). The image below is the guideline on how to see the wave:
Wave 1 to 5 represents the bull (up) market and point A, B and C represents the bear market.
To fully understand the basics of the Elliot Wave, you can visit Introduction to Elliot Wave Analysis link.
RSI - a technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.
MACD - is a trend-following momentum indicator that shows the relationship between two moving averages of prices. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy and sell signals.
This may sound too technical for us. To make it easy the lines should have a positive signal (value) and should be pointing up to indicate a possible rally on the market. Likewise, if the signals are pointing down it should indicate that the market will go down and will correct soon.
Now that we know the basics, let us apply it on our Philippine Stock Exchange index:
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For us to confirm what will be the trend of the market, we need to analyze the signals of the three (3) indicators.
Based on the Elliot Wave analysis, the market already completed the wave cycle from point 1 to 4 and we can expect that it will rally beyond the previous high. The question now is can the market break its channel trading of 6,800 resistance and 6,000 support level.
RSI already indicated that it is on its oversold level (below the 30 line). This is a signal that the market will bounce back and will have upside for the following days.
MACD readings show a downtrend and negative indicators, which means that the market will still go down unless it will be positive on the coming days.
Based on the indicators above, the market is a bit volatile in the short term for traders. Unless the market breaks again its support and go down below its previous low of 5,600, all we can see is a range trade from 6,000 to 6,800.
For long term investor, this is the right time to invest or add shares to your portfolio! There are a lot of shares right now that are cheap to buy and their fundamentals is good.
If you have any questions, suggestions and request, please don't hesitate to put your comments here. I am very willing to help! Good Day! Happy Investing!
