Staying Ahead of the Markets

Outline

1 2 3 4 5 6

Summary
Understanding Technical
Financial Analysis 101
Introduction Markets
Trend
Watching Fundamental Economic Picture
Analysis
 Trend Watching tips
• Know why you are tracking trends
– What is a trend?
• Have a point of view
• Build your arsenal of resources
• Fine tune your trend framework
• Embed and apply
 Know why you are tracking trends
• It makes you feel in the NOW and in the
KNOW. Simply, the way we see it.
• It should lead you to profitable
opportunities.
What is a trend?
How about: “A statistically significant
CHANGE in performance of measured
data which is unlikely to be due to a
random variation in the process.” That
won't get the creative juices going. So
consider the following definition, which
we came up with years ago and which
still holds pretty well:
A manifestation of something that
has unlocked or newly serviced an
existing (and hardly ever changing)
consumer need,* desire, want, or
value.
People have different

Points of View
 Common Misperception
• Gazing into a crystal ball
– Trend watching is simply understanding
what’s already happening, the Major and
Minor movements.
 Common Misperception
• Declaring an emerging trend
– Distinguishing the difference between trends
and fads or in our case a Rally or Correction.
– Example
• A pizza cone, a fun product but won’t change
dramatically the consumers.
 Common Misperception
• Applying all trends to people
– Don’t’ fall for this one.
– Never pretend that a certain trend will affect all.
• Remember every trend has an anti-trend.
 Common Misperception
• Trend watchers have to posses a rare gift.
– Definitely not TRUE,
– You just need an open mind, if you want to
spot trend, YOU Can.
 Have a Point of View
• Have your own view
– Know the short-term and long-term trend
• Be curious (ask questions) and open minded
– Markets seem to be more than meets the eye
• Look from Top – Bottom
– Changes in market sentiments
• You don’t have to like every trend
• Be Objective
– Get rid of taboos, prejudices, dogmatism and
negativity
Don’t hide: An open mind is a joy forever !
 Have a Point of View
• Make sure to have an view about the
markets. The more trends you spot and
track. The more skilled you are in putting
these trends to use.
• The more guidance, will eventually lead to
a broad picture of the market and tiny
observations will start to make sense.
– Trend Reversals
Establish your ‘virtual research command center”
 Build your arsenal of resources
• Take advantage of FREE info on the web
– Papers, websites, mags
– TV, Movie, Radio
– Seminars, Fairs, Trade Shows
– Customers, Clients, Collegues, Friends,
Family
– Competitors
– Other Trend Firms, Thinkers
 Fine Tune your trend Framework
• Macro trends( STEEP Approach)
– Social
– Technological
– Economic
– Environment
– Political
• Industry/Category Trends
• Individual Trends
 Embed and apply
• Every company should have its trend monitoring
group.
– It’s a state of mind.
• Get Senior backing
– Its just a language and perception issue as the word
‘trend’ still evoke an image of a flamboyant fashion
designer or a fortune teller.
• Make it visual
– A picture paints a thousand words
One day, this could be you; -)
 What is Economics?
• A social science that studies how individuals,
governments, firms and nations make choices
on allocating scarce resources to satisfy their
unlimited wants. Economics can generally be
broken down into:
– macroeconomics, which concentrates on the behavior
of the aggregate economy;
– microeconomics, which focuses on individual
consumers.
 Demand and Supply
• One of the fundamental concepts of
economics and it is the backbone of the
economy.
– Scarcity perhaps is the main reason for this
concept.
– Water and Diamond Paradox
 Measuring Economic Health
• Just as doctors and nurses measure vital signs of
a patient. Investors and its key plays must also
keep watch of the state of the economy. The only
difference is the vigil never stops.
• Important Economic Indicators
– GNP and GDP : The Holy Grail of Economics
• reflects at what rate the economy is growing.
– CPI: What is your wallet really worth?
• measures what people are paying for goods and services in
comparison with the past. It often influence the BSP’s policy
decisions.
Macroeconomic Framework
Market Indicator
Economic Activity Gross Domestic Product (GDP)

Goods Market Inflation Rate

Funding Market Interest Rate

External Market Foreign Exchange Rate

External Market (portfolio) Stock Market

23
 The Circular Flow

Household

Income Consumption

Financial
Institutions

Employment
Production

Production Sector
 Controlling Money Flow
• Keeping a country’s economy afloat requires a
pilot whose main jobs is to keep it from stalling or
overheating.
• The controlling the amount of money in
circulation, the process of injecting or
withdrawing money reflects the monetary policy
that the central bank adopts to stir the economy.
– Example: rising its overnight rates
BSP Policy: Theory Versus Policy
Bangko Sentral
Ng Pilipinas

This is the way

Bank
Economy, people think Reserves
Inflation monetary policy
works.

Money
Supply
 BSP Policy: Theory Versus Policy
Bangko Sentral
Ng Pilipinas

This is HOW it
Economy, Bank
Inflation really works. Reserves

Money
Supply
Consumer and
Business
Spending

Interest
Rates
How Does the BSP put the Brakes on the economy ?

Economic Growth of
Growth Stock
Too Rapid Bank
Prices
Reserves
Decline
Decline

Interest
Inflation Rate
Too High rise

If the economy is growing too rapidly and the inflation rate is too
high, The BSP will tighten monetary policy by slowing down the
growth rate of bank reserves, which will raise short-term interest
rates.
 GNP: Gross National Product
Consumption + Investment + Government + Export - Import
• Is the sum of goods an services produced by the Philippines
• For our purposes, it should be view as a measure of demand for
Philippine Output.

How the Markets React: GNP Market Reaction

Fixed Income: Up Down
Down Up
Equity : Up Up
Down Down
USD/PhP: Up Up
Down Down
CPI: Consumer Price Index (Inflation rate)
• It measures what people are paying for goods and
services in comparison with the past. It often
influence the BSP’s policy decisions.
– Indication of demand pressures?
– Second round effects?

How the Markets React: Inflation Rate Market Reaction

Fixed Income: Up Down
Down Up
Equity : Up Down
Down Up
USD/PhP: Up Uncertain
Down Uncertain
 Inflation can Stem from any of Several Cause

Inflation

Medical Care
Oil Shocks El Nino/La Nina Labor Costs
Costs
 Second Round Effects

Supply First Second

Shocks round Round

Shift in CPI
Rising oil Rising Oil, expectations
Prices Transportation
& Power Costs Increase
Minimum
Wage
 Interest Rates -Fixed Income Securities
• 3M Treasury Bill : Benchmark for loan pricing
– primarily influenced by inflation/currency
• Fixed income securities appeal to many investors
as they promise to pay a set amount of interest
on a regular basis and the issuer promises to pay
the loan in full and on time.
– Government : For its activities/pay debt
– Corporate : Raise capital for expansion/takeover
 How the Economy affects
the Fixed income Market
Interest
Rates

ECONOMY
Bond
Market

Interest
Rates

ECONOMY
Bond
Market
 How Bond Yields and Gov’t
Security prices are related?
Suppose the Bureau of Treasury issues a bond at
prevailing Interest rate of , say 8.00 percent….
8.00 % PhP1,000
The bond holder will pay the par value of PhP1,000.00

nt
6 . 00 perce
to
s fall
If inte
re st rate PhP1,200

is
i ts return
ause
6.00 % d ri s es bec
bon ond
r ic e of the a new b
The p ha t of
than t
higher
The pric
e of the
bond fa
Its 8.00 lls beca
p use
attractiv e rce nt retur
e. n is le
ss
10.00 %

PhP800.00

But if in
te rest rate
sr ise to 10
percent…
…
 Impact on Bond Markets
Positive Negative
Volatility in stock Interest rate cuts
markets Tax cuts
Interest rate increases High inflation
Tax increases Loose money supply
International conflicts
Controlled inflation
Tight money supply
 Philippine Yield Curve
11

3
3M 6M 1YR 2YR 3YR 5YR 7YR 10YR 20YR
6/13/2006 9.095 9.386 9.377 10.161 10.654 11.039 11.739 12.114 12.777
4/24/2006 4.620 5.340 6.030 6.166 6.221 6.439 6.722 6.882 8.622
12/29/2006 5.144 5.527 5.598 5.692 5.796 5.987 6.079 6.380 8.017
3/30/2007 4.0946 4.4346 4.8211 5.3771 5.5918 6.0857 6.8104 7.1714 8.6789
1/7/2008 4.0885 4.8365 5.6481 5.8096 5.8981 6.0854 6.3077 6.6038 8.3731
37
 Foreign Exchange (Peso)
• A country’s currency, like its language is
closely linked to its national identity.
• Factors affecting the currency
–Relative prices (inflation: lower the stronger)
–relative interest rates :considers opportunity
–relative economic growth rates
–Country’s current account
 Spread Compression affects the Peso
When interest rates are higher in the ROP than in
18.5 10YM-10Y$UST (1.77360, 1.77360, 1.77360, 1.77360, +0.000), USD/PHP (48.9500, 48.9500, 48.9500, 48.9500, +0.11000) 59
18.0
other countries …. 58
17.5 57

17.0 56
55
16.5
54
16.0
53
15.5
52
15.0
51
14.5
50
14.0
49
13.5 48
13.0 47
12.5 46
12.0
The peso falls…. 45
11.5 44
11.0 43
10.5 42
41
10.0
40
9.5
39
9.0
38
8.5
37
8.0
36
7.5 35
7.0 34
6.5 33
6.0 32
5.5
. . . .the Peso tends to rise. 31
5.0 30
4.5 Legend: 29
4.0 28

3.5
Blue : USD/PhP
But when Peso interest 27
26
3.0
Orange: % Spread between PhP-USD rates are lower than other 25
2.5
2.0
countries….. 24
23
1.5
22
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
 Link between Interest Rates
and Value of the Peso
PhP Interest Demand for
Dollar Demand for PhP
Rates
Investments Fixed-Income Value of the
Relative to
Declines Securities in the PESO
Rates Overseas
PhP rises rises
Rise

Demand for
PhP Interest PhP
Demand for Fixed-Income
Rates Value of the
Dollar Securities in the
Relative to PESO
Investments PhP
Rates Declines
Rises Declines
Overseas
Decline
 What determines Volatility?
• Information considerations:
– Evaluate the implications of the information.
• Hedging or Speculation:
– an increase in activity by in a class of agents..forcing
prices up/down
• Market liquidity:
– ability to absorb orders with little price movement.
• Physical availability of the commodity
– law of supply and demand
 Stock Market
• Know as a leading barometer of the economy
– influenced by external factors, peso, interest rates
domestic economy, political factors
• They exist for many of the same reasons
wherever they are:
– To raise investment capital
– Centralize buying/selling of shares
– Provide investors with financial incentive to put
money into equity in some places to create a market
for privatizing state assets.
 Impact on Equity Markets
Positive Negative
Economic expansion Recession
Interest rate cuts Interest rate increases
Tax cuts Tax increases
Rising corporate profits Declining or stagnant
Political stability corporate profits
High employment rate International conflicts
Loose money supply Pending elections
High unemployment rate
Tight money supply
Factors Affecting the Stock Market
Management Technological Cost Control
Changes Developments Procedures

MICROECONOMIC VARIABLES

Stock Prices/Corporate Profits

MACROECONOMIC VARIABLES

Economy Inflation Interest Rates

How the Macro economy Affects Corporate
profits and Stock prices?
In the ‘perfect world’, when economic growth is up, and inflation
and interest rates are down, corporate profits and stock prices rise.
Economic
Growth
Rises

Inflation
Declines

Corporate Stock
Interest Profits Prices
Rate
Declines
Rise Rise
 How the Macro economy Affects
Corporate profits and Stock prices?

Economic
Growth
Declines
Corporate Stock
Profits Prices
Decline Decline
Inflation
Rises

Interest
In the ‘perfect world’, when economic growth is down, and inflation
Rate
and interest rates are up, corporate profits and stock prices
Rise
decline.
How to use financial
statements
 Why bother studying Financial Statements?

• OWNERS need to understand them to get most

of their investments
• LENDERS need them to assess loan
applications
• MANAGERS use them to spot strengths and
weakness of companies
• EMPLOYEES use them to assess the financial
condition of their employers. Jobs seekers now
look at them whenever possible to help weigh
job offers.
 Whatever you situation,
understanding financial
statements will enrich your
business life.
 FS, tools to analyze a business.
• They consist of three ( 3 ) separate-yet-
interrelated reports:
– BALANCE SHEET:(Statement of Financial Position).
This provides a snapshot of a company’s financial
strength at a point in time. It contains the list of
assets, liabilities and capital
– INCOME STATEMENT: This shows how profitable
the organization has been over a specific time period
– CASH FLOW STATEMENT: This tells how much
cash the company generated over time and where it
went. It’s a number that bears little resemblance to
profit.
 Balance Sheet
Noble House
Statement of Profit and Loss
December 31, 2007
(In Million Pesos)

2006 2007 Changes

Current Assets
Cash 2,000 900 (1,100)
Marketable Securities 1,000 1,000
Accounts Receivable 2,000 2,500 500
Inventory 2,000 2,300 300
Prepaid Expenses 100 100
Total Current Assests 7,100 6,800 (300)
Investment in Affiiated Co. 200 200
Property, plant & equipment
Cost 5,000 6,000
Acc. Depreciation 3,000 2,000 3,200 2,800 800
Other assets 200 200
Total Assets 9,500 10,000 500

Liabilities:
Account Payable 300 500 200
Accured Expenses 1,300 1,200 (100)
Curent portion, LT Debt 200 200
Total current liabilities 1,800 1,900 100
Long-term debt 2,000 1,800 (200)
Owner's Equity:
Capital Stock 2,000 2,000
Retained Earnings 3,700 5,700 4,300 6,300 600
Total Liabilities and Equity 9,500 10,000 500
 Assets = Liabilities +Capital
• Asset: is defined as something owned by a
company that will be used to generate
income.
• Liability: is an obligation for which the firm
has to pay money to others.
• Equity: is what’s left over after the
liabilities have been deducted from the
assets.
 Relationships

Assets – Liabilities = Owner’s Equity

(Also know as NET worth)
Assets = Liabilities + Owner’s Equity

• This relationship explains why you need more

than assets to run a business: To get those
assets you have to pay for them with another
asset (like cash), or with a proceeds of debt (a
liability) or by contributed capital or retained
earnings (equity)
 Why “balance” sheet?
• Both sections of the statement
– Assets on one side
– Liabilities and equity
• Always equal each other.
 Income Statement
Noble House
Statement of Profit and Loss
December 31, 2007
(In Million Pesos)

Net Sales 10,000

Cost of Goods Sold 7,000
Gross Profit 3,000
Operating Expenses
Selling, General and
Administrative 1,600
Depreciation 200 1,800
Profit from Operations 1,200
Interest Expense 200
Income Before Taxes 1,000
Income Tax Expense 400
Net Income 600
 How Profits affect the Balance Sheet
Income Statement Balance Sheet
Sales Leads to Increase in Accounts receivable
or cash
- Cost of goods sold Leads to Decrease in inventory
= Gross profit
- operating expenses Or Increase in accrued expenses
Or Increase in accounts payable
Or Decrease in cash
Or Decrease in prepaid expenses
= Net Profit Leads to Increase retained
earnings(owner's equity)
 Cash Flow Statement
Noble House
Statement of Cash Flow
December 31, 2007
(In Million Pesos)

Cashflow from Operations:

Net Profit 600
Depreciation 200
800

Changes to operating assests and liabilities:

Accounts receivable (500)
Inventory (300)
Accounts payable 200
Accured expenses (100) (700)
Net cash provided by operations 100
Cash flows from investing activities:
Additions to property, plant
and equipment (1000.00)
Net cash from financing activities:
Repayment of long-term debt (200.00)
Net cash provided (used) (1,100.00)
 Together, these statements
provide data that represent
the financial strength and
performance of a business.
They can reveal
opportunities and forewarn
of pitfalls.
 Accrual Concept
• Your checkbook is an easy-to-understand
cash-based accounting. You record the
check you write and deposits you make.
• Thus, revenue equals cash received and
expenses equal cash paid.
• But accrual accounting is something more
than meets the eye.
 The useful accrual accounting
• It is revenue recognized when you make
a sale or provide service not when you get
paid.
• Likewise, you incur(and record) an
expense when you receive the benefit of a
service or when you use an asset to
produce a revenue – not when you pay for
it.
 Accrual Accounting
• Focuses more on the economic substance of the event
instead of the movement of cash.
• It is a way of recognizing that revenue can be earned
either before or after cash is received, and that expenses
are incurred when you receive a benefit – like shipment
of supplies – and before (or after) you pay for it.
– An expense will sometime be accrued and reported even without
an invoice.
• A good example is interest due every six (6) months on a debt. Your
books will show an accrued interest monthly or quarterly, even
though you pay it every six (6) months.
 Why show it?
• The expense affects your organization
(and your decisions) regardless of when
you pay it.
 Accruals and Depreciation
• Purchases usually become expenses
when materials are used/consumed in the
process of generating revenue.
• Accrual accounting is based on the
matching of expenses and revenue they
generate.
 Example
• You can deduct the cost of a printer ribbon
immediately. But what about an expensive
treasury Dealing phone System? If you
deduct the full cost of a large asset say
US$650,000 immediately after purchase,
you would distort your income.
– There will be a mismatch, your expense
would not match the number of years the
machinery would generate revenue for you.
 Solution
• Depreciation
– You depreciate a portion of that expense at
the end of the accounting period,
– This will give you a better view of an item’s
contribution to your operation.
 Trouble with Cash Accounting
• It can be MISLEADING
– You can earn revenue and pay the expenses it took
to generate that revenue, long before you see any
money.
– Thus you can show a loss when you are making
money.
– You can misrepresent expenses and income by the
way you time payments. It is easy to inflate income
(by simply delaying payment of bills.)
 A look at Leverage
• Leverage is the level of a company’s debt in
relation of owners equity.
– Those with lots of debt over equity are RISKIER than
those with lots of equity and little debt
– Highly leveraged firms do not have a cushion to
protect them from trouble like operating losses or
reduction in asset values.
– Noble House has PhP6,300 in equity and PhP3,700
in liabilities – modest, low-risk leverage
 Are we making money yet?
• Gross Profit/Net Sales:
– Revenue- Cost of goods sold(COGS)
• Cost of Good Sold (COGS)
– Beginning inventory+Production-ending inventory
• Operating expenses:
– Includes selling expenses, salaries, utilities
• Income from Operation
– Gross Profit – Operating expenses
• Net Income
– ‘The bottom line” is amount left after deducting all expenses from
revenue.
 Now that you know the
principal elements of a
financial statements,
Your ready to learn a few
tools that can help you
understand a company’s
SWOT
 What can ratio’s tell us?
• To grasp a firm’s financial health, it is
important to understand the relationship
between the key items in the financial
statement.
• You want to track this relationship over
time and compare them with averages of
the industry.
 Quick Example
• Which company is stronger?
– Company A has a net worth of PhP100mio
– Company B has a net worth of PhP10mio
– Company A has PhP600mio in assets
– Company B has PhP20mio in assets
– Assets = Liabilities + Net Worth
 Useful Ratios
• Quick Ratio:
– Current Assets/Current Liabilities
– This is quick way to see if its liquid
• Debt Cover Ratio
– Net Income +Non cash Charges/Current
maturities of long term debt.
– This shows if company is sufficient in meeting
its obligations
 Useful ratios
• Return On Assets
– Net Income/Total assets
– The resulting number should at least equal a
risk-free asset rate. (Treasury Bills rates)
• Return on Equity
– Net Income/ Shareholders equity
– Tells whether the investor is getting a
worthwhile on their investment
 What’s Next
• Gathering the numbers is just one thing.
• Numbers alone cannot predict anything
with certainty. The future holds a lot of
variables.
• However, the values you gather when
related and extrapolated outward should
begin to show a TREND that point to the
likelihood of a possible outcome.
 Ratios: Converting numbers into Trends
• The Financial ratios help you see the trend
– The Uptrend: Everybody’s favorite
– The Down Trend: Though negative helps
identify potential problems.
– Stable Trends: Can be reassuring or hard to
interpret. (like profit margins remains at 15 %)
– Random Trends: Hopefully you get to see a
trend
– Changing Trends: when a reversal happens.
Niccolo Machiavelli (1469-1527)
• "Wise men say, and not without
reason, that whoever wishes to
foresee the future must consult the
past; for human events ever resemble
those of receding times. This arises
from the fact that they are produced
by men who have been, and ever will
be, animated by the same passions,
and thus they must necessarily have
the same results."
What is Fundamental Analysis?
• Fundamental Analysis is a method of
forecasting the future price movements of
a financial instrument based on economic,
political, environmental and other relevant
factors and statistics that will affect the
basic supply and demand of whatever
underlies the financial instrument.
 What is Technical Analysis?
• Technical Analysis is a method of
predicting price movements and future
market trends by studying statistics of past
market action which takes into account
price of instruments, volume of trading,
and when applicable open interest.
“Like all other arts, the Science of Deduction and Analysis is one which can only be
acquired by long and patient study, nor is life long enough to allow any mortal to attain
the highest possible perfection in it.” ---Sherlock Homes, A Study in Scarlet
 Fundamental Vs. Technical
Fundamental Technical
Focuses on what ‘ought’ Focuses on what
to happen in a market ‘actually’ happens in a
market
Factors involved in price Charts are based on market
analysis include: action involving:
-supply and demand -Price
-Seasonal cycles -Volume – All Markets
-Weather -Open Interest (Futures
-Government market)
 Underlying Principles of Technical Analysis

• Market action discounts everything

• Price movements are not totally random
• History repeats itself
 Advantages of TA
• Portability
• Focus on Price
– Help you create a trade plan
• Analysis of Price action
– Prices(OHLC) reflect forces of supply and
demand.
– Identification of Support/Resistance
• SUPPORT - buyer’s market
• RESISTANCE - seller’s market
 Advantages of TA
• Pictorial Price History
– Reactions prior to and after important events.
– Past and present volatility.
– Historical volume or trading levels.
– Relative strength of a stock versus the overall
market.
 Disadvantages of TA
• You cannot use the past to predict the future
• Price movements are random
• Technical Analysis creates a self-fulfilling
prophecy
• Analyst Bias - Open to Interpretation
• Always another level, always need a
confirmation
 Chart Analysis: What You Need to Know?

• Strength of the current trend.

• Maturity or stage of current trend.
• Reward to risk ratio of a new position.
• Potential entry levels for new long position.
General Steps to Chart Reading
TOP DOWN APPROACH
• Broad Market Analysis
– (DJIA, NASDAQ,PHISIX,DXY)
• Sector Analysis
– Identify the strongest and weakest groups in the
market
• Individual Security Analysis
– Identify the strongest and weakest security in the
group
 Types of Charts Used
• Bar Chart, depicting the open, close,
high and low prices on a day-to-day
basis.
• Line Chart, for moving averages and
oscillators
• Point and Figure charts, highlights the
reversals and swings in the market
 Bar Chart Line Chart
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PF Chart
91-Day T-BILLS (6.4350, 6.5000, 6.3490, 6.4350 +0.2190)
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91-Day T-BILLS (6.4350, 6.5000, 6.3490, 6.4350 +0.2190)
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91-Day T-BILLS (1.280x3.840-H/L) (6.2160, 6.5000, 6.1500, 6.4350 +0.2750)
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1986 1988 1989 1990 1991 1992 1993 1994 199519961997 19981999 2000 2001 2002
2003 1986 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
2003 1986
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AprMay
JunJulAug
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Dec
 Types of Technical Analysis
• General Charting Techniques or
Pattern Recognition.

• Mathematically Derived Indicators

General Charting Techniques
• Dow Theory, developed by Charles
Dow. This is considered the
forefather of Technical Analysis.
• Elliott Wave Principle, discovered by
Ralph Nelson Elliott in the wake of
the Great Depression which caused
the US. Stock Market crash of 1929.
 Dow Theory
• The averages discount everything.
• The market moves in trends
• The major trend has three phases
• Averages must confirm each other
• Volume must confirm trend
• A trend is in effect until it gives a definite
signal that it has reversed
 Criticism against Dow Theory
• The signals are too late.
• A person cannot buy or sell the
averages.
 Conclusion
• The Dow Theory provides a strong
foundation for the study of
Technical Analysis.
 Market Observations
• (Let’s begin with a few observations)
• Support or Resistance, when revisited, will provide support
or resistance again.
• In reaction to events, market behavior tends to repeat itself.
• Price Behaves in two ways – it forms trends (up/down) or it
consolidates.
• These logical observations form some of the basic tenets of
technical analysis. The market tends to “remember” where
profits or losses are made, and these are frequently at
support and resistance levels where a break has occurred.
 Principal Charting Tools
• Support and Resistance
• Trend lines
• Channel lines
• Gaps
• Pattern Recognition
 Support & Resistance
• Support is defined as an area below
current market price where buying
pressure prevents the market price from
falling.
• Resistance, on the other hand is defined
as an area above current market price
where selling pressure prevents the
market from going any higher.
 1M MART1
21.0 MART Tenor Fixing Rate 1M (5.37920, 5.37920, 5.28850, 5.30960, -0.02120) 21.0
20.5 20.5
20.0
Spike 20.0
19.5 19.5
19.0 19.0
18.5 18.5
18.0 18.0
17.5 17.5
17.0 17.0
16.5 16.5
16.0 16.0
15.5 15.5
15.0 15.0
14.5 14.5
14.0 14.0
13.5 13.5
13.0 13.0
12.5 12.5
12.0 Resistance 12.0
11.5 11.5
11.0 11.0
10.5 10.5
10.0 10.0
9.5 Resistance 9.5
9.0 9.0
8.5 8.5
8.0 8.0
7.5
8.50 7.5
7.0 7.0
6.5 Resistance 6.5
6.0 6.0
5.5 5.5
5.0 5.0
4.5 4.5
4.0 Support 4.0
3.5 3.5

1.5 Relative Strength Index (34.0178), Volume (0)

1.0
0.5
0.0 50
-0.5
-1.0
1998 D 1999 M A M J J A S O N D 2000 M A M J J A S O N D 2001 M A M J J A S O N D 2002 M A M J J A S
 Characteristics of Support and Resistance

• Formed from past price actions

• Establishment or Penetration has
psychological consequences
– The longer it takes to break support or
resistance the more significant it becomes.
– The greater the number of times the market
tries to break the chart point and fails the
stronger the price barrier.
 3M T-Bill Rate
91-Day T-BILLS (7.86500, 7.95000, 7.75000, 7.86500, -0.00400)
38 38
37 35.15 37
36 36
35 35
34 34
33 33
32 32
31 31
30 30
29 29
28 28
27 27
26 26
25 25
24 24
23 21.00 B Resistance 23
22 22
21 21
20 20
19 19
Resistance
18 18
17 17
16 16
15 15
14 14
13 13
12 12
11 11
10 10
9 9
8 Support 8
7
8.60 A Resistance
7
6 6
5 5
4 Support 4
3 3
2
C 4.00 2

1986 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
 3M Phibor Rate
33 3M PHIBOR (9.5000, 9.1875, 9.1875 -0.3750) 33
32 32
31
32.8125 31
30 30
29 29
28 28
27 27
26 26
25 25
24 24
23 23
22 22
21 21
20 20
19 17.625 19
18 Double Top 18
17 17
16 16
15 15
14 14
13 Resistance 13
12 12
11 11
10 10
9 Double Bottom 9
8 9.6875 8
7 7
6 Support 6
5 5
4 5.0000 4
100 Relative Strength Index (66.1965) 100
90 90
80 80
70 70
60 60
50 50
40 40
30 30
20 20
10 10
A S O N D 2001 M A M J J A S O N D 2002 M A M J J A S O N D 2003 M A M J J A S O N D 2004 M A M
 Trend lines
• Trend is simply the direction of the market.
• Trend lines are moving support points or
resistance points
– Newton’s 1st law of motion: A body remains at
rest, or if in motion, it remains in uniform
motion with constant speed in a straight line
unless acted upon by an unbalanced external
force (in our case: traders and investors)
 Philippine Peso
USD/PHP (51.3100, 51.3400, 51.2700, 51.2800 -0.0250)
56.5 55.75 ( 3 ) 56.5
56.0 56.0
55.5 55.5
54.335
55.0 3 55.0
54.5 54.5
54.0 54.0
53.5 53.5
53.0 53.0
52.5 52.5
52.0 52.0
51.5 51.5
50.10
51.0 1 51.0
50.5 50.5
4 50.60
50.0 50.0
49.5 49.5
49.0 49.0
48.5 48.5
48.0 48.0
47.5 47.5
47.0 2 47.35 47.0
46.5 46.5
46.0 46.0
( 4 ) 46.00
45.5 45.5
45.0 45.0
44.5 44.5
44.0 44.0
Relative Strength Index (50.1636), Volume (106,500,000)
25000 90
80
20000 70
60
15000 50
40
10000 30
20
5000
x10000 10
September November 2001 February March April May June July August September November 2002 February March April May
Characteristics of Rising Trend lines
• Successive higher highs and lows.
• Market psychology is bullish; since players
are willing to buy at higher prices along the
support while sellers are willing to unload
at higher prices.
• to construct a rising trend line; draw a
tangent connecting two (2) successive
higher reaction lows.
Characteristics of Falling Trend lines
• Successive lower highs and lows
• Market psychology is ultimately bearish;
sellers are willing to unload at lower prices
while buyers will only accumulate at lower
prices.
• To construct a falling trend line, draw a
tangent to lower successive reaction
highs.
 Historical 3M T-bill rate
91-Day T-BILLS (7.86500, 7.95000, 7.75000, 7.86500, -0.00400)
38
35.15 38
37 37
36 36
35 35
34 34
33 33
32 32
Down Trendline
31 31
30 30
29 29
28 28
27 27
26
Resistance 26
25 25
24 24
23
21.00 23
22 22
21 21
20 20
19 19
18 Resistance 18
17 17
16 16
15 15
14 14
13 13
12 Trend line 12
11 11
10 10
9 9
8 8
Support
7 7
6 8.60 6
5 5
4 4
Support
3 3
2
4.00 2

1986 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
 Last notes on trend lines
• The longer it takes to penetrate the trend
line the more significant
• The more times the price touch the trend
line the more significant it is.
• The stronger the trend line, the more
probability exists for trading in the direction
of the trend in force.
 Still on trend lines
• The stronger the trend line the more
important is its penetration.
• Implication of the trend penetration, a
change in slope but trend is maintained,
market consolidation is to be expected , a
trend reversal is in effect.
 Channel Lines
• Newton’s Law of Motion states that for every
action there is an equal opposite reaction.
Channel lines are drawn opposite trend lines.
• Trend lines are used to lighten up positions or to
aggressively add positions against the trend.
• Penetrations of channel lines indicate an
acceleration of trend.
• Lack of attempts on channel lines may mean the
weakening of trend.
 3M T-Bills
91-Day T-BILLS (7.86500, 7.95000, 7.75000, 7.86500, -0.00400)
38
35.15 38
37 37
36 36
35 35
34 34
33 33
32 32
Down Trendline
31 31
30 30
29 29
28 28
27 27
26
Resistance 26
25 25
24 24
23
21.00 23
22 22
21 21
20 20
19 19
18 Resistance 18
17 17
16 16
15 15
14 14
13 13
12 Trend line 12
11 11
10 10
9 9
8 8
Support
7 7
6 8.60 6
5 5
4 4
Support
3 3
2
4.00 2

1986 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
 USD/PhP
Philippine Peso (Monthly) (56.2300, 56.4500, 56.2300, 56.3250, +0.04500) 56.45
65 III 65

V
60 55.75 V 60

55 55

50 50
46.50 III
IV
45 45

50.17
40 40
30.58
35 I IV 37.52 35

28.00 I
30 30

25 25

II 23.55
20 II 20

22.65
15 15

10 10

5 5

2.00
0 0

100 Relative Strength Index (67.6990) 100

90 90
80 80
70 70
60 60
50 50
40 40
30 30

62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
 Gaps
• Are holes in the market where no trading
took place, the market just accelerated
beyond these points.
• Gaps are formed because of extreme in
supply and demand
• Four (4) possibilities exist for gaps:
consolidation, a new trend, continuation of
the trend and lastly a trend reversal.
 Gaps
• CONSOLIDATION GAP; market is locked in a
range.
• BREAK AWAY GAP; usually occur after a
continuation pattern, marks the beginning of a
significant move.
• RUN AWAY GAP; occurs during the middle of the
strong price move.
• EXHAUSTION GAP; occurs near the end of a
market move; connoted as the last breath of a
dying trend. A typical example is a island reversal
gap.
 3M T-bill
91-Day T-BILLS (7.86500, 7.95000, 7.62500, 7.87800, +0.00900)
38 38
37 37
36 36
35 35
34 34
33 33
32 32
31 31
30 30
29 29
28 28
27 27
26 26
25 25
24 Break Away Gap 24
23 23
22 22
21 21
Run Away Gap
20 20
19 19
18 18
17 17
16 16
15 Exhaustion Gap 15
14 14
13 13
12 12
11 11
10 10
9 9
8 8
7 7
6 Consolidation/ Consolidation Gap 6
5 Sideways 5
4 4
3 3
2 2

1986 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
 Triangles
• Area continuation patterns which occurs
as intermissions in the direction of the
trend.
• There are three (3) types; Symmetrical,
Ascending and Descending triangles
DJIA
 Symmetrical Triangles
• Minimum requirements is four (4) reversal
points, marked by two (2) converging trend
lines which meet at the apex.
• Volume should diminish as the triangle
matures.
• Characterized by the narrowing price
movements.
 Ascending Triangles
• Almost horizontal boundary while the
lower boundary slopes upward.
• Has bullish implications, as buyers are
more aggressive.
• Note that upper trend line becomes a
future support in the future.
 Descending Triangle
• Considered as bearish pattern.
• Marked by a descending upper boundary
and a flat lower boundary.
• Sellers considered to be more aggressive
than buyers.
• Break out on the down side occurs on
heavy volume, lower boundary becomes a
future resistance area.
 Characteristics of Triangles
• Consolidation Phase
• Minimum of four (4) reversal or touch
points within the triangle. Typically six
touches within the triangle
• Measure objective equals width of the
widest part of the triangle
 Wedges
• Are similar to symmetrical triangles in
terms of shape and the time required.
• Wedges have clear trend implications,
depending on the type.
• Two (2) type of Wedges
– Rising Wedge
– Falling Wedge
 Rising Wedge
• Volume contracts as wedge matures but
expands upon break out.
• Has bearish implications.
• Formed by two upward sloping boundary
lines which meet at the apex
 Falling Wedge
• Volume contracts as the wedge matures
• Formed by two downward sloping
boundary lines which meet at the apex
• Has bullish implications
• Falling wedges take less time to form than
rising wedges
2.35
USD/SGD USD/SGD (1.65140, 1.65660, 1.64370, 1.65160, -0.00190)
2.35

2.30 2.30

2.25 2.25

2.20 2.20

2.15 2.15

2.10 2.10

2.05 2.05

2.00 2.00

1.95 1.95

1.90 1.90

1.85 1.85

1.80 1.80

1.75 1.75

1.70 1.70

1.65 1.65

1.60 1.60

1.55 1.55

1.50 1.50

1.45 1.45

1.40 1.40

1.35 1.35

Relative Strength Index (26.8238)

50 50

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
 Reversal Patterns
• Signals when a trend is about to reverse.
• Common traits for reversal patterns;
existence of the previous trend; Important
trend line broken, The larger the previous
trend the larger the following reaction.
• Top forming last shorter and volatile while
bottom forming have tighter price
movement and longer time to form.
 Head and Shoulders
• Creation of a left shoulder with heavy
volume followed by a dip. A rally higher
with lighter volume. A dip below the left
shoulder which crates the neck line. A
third rally which forms the right shoulder.
A dip below and a close below the neck
line. A return move met by a resistance at
the neck line. An inverse head and
shoulder would come.
1400
USD/KRW
USD/KRW (1,066.15, 1,074.50, 1,065.30, 1,068.80, +3.15002)
1400
H
1350 S 1350

1300 S 1300

1250 1250

1200 1200

1150 1150

1100 1100

1050 1050

Relative Strength Index (16.3777)

50 50

2000 2001 2002 2003 2004

 Double/Triple Top Formation
• Characteristics are similar to H & S but only has
two (2) peaks
• Similar to H & S but the assumed head is the
same level as the shoulder
• Volume tends to decline with creation of each
peak.
• Formation is not complete until the support
levels of the formation is broken.
• Volume on any rallies form a triple bottom is
important.
3700
3600
Philippine Composite Index PHILIPPINES (1,743.60, 1,822.99, 1,743.60, 1,795.59, +52.7799) 3700
3600
3500 3500
3400 Triple Top 3400
3300 3300
3200 3200
3100 3100
3000 3000
2900 2900
2800 H 2800
2700 2700
2600 2600
2500 2500
2400 2400
2300 S 2300
S
2200 2200
2100 2100
2000 2000
1900 1900
1800 1800
1700 1700
1600 1600
1500 1500
1400 1400
1300 1300
1200 1200
1100 1100
1000 1000
900 900
800 Double Bottom 800
700 700
600 600
500 500
400 400
300 300
200 200
100 100
0 0
-100 -100
-200 -200
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
 Rounding formations
• Represent slow and very gradual change
in trend
• Saucers bottoms are more common than
saucer tops
• Significant increase in volume must
accompany a rally from a saucer bottom
 Spike Formation
• Occurs when the previous trend is a run
away trend. The market is emotional and
out of control.
• Characterized by a key reversal pattern
usually an island reversal. (Whipsaw
pattern)
• Subsequent reaction might correct at least
30% to 50% of the previous advance.
 3M T-Bill rate (Spike, DB/DT/RB)
3M PHIBOR (7.50000, 7.25000, 7.25000, -0.18750)
31 31
30 30
29 Spike 29
28
Q 32.8125 28
27 27
26 26
25 25
24 24
23 23
22 22
21 21
20 20
19 17.625 19
18 Double Top 18
17 17
16
k Spike 16
15
Q 15
14 14
13 Resistance 13
12 12
11 11
10 10
9 Double Bottom 9
8
9.6875 8
7 7
6 Support 6
5 5.0000 Rounding Bottom 5

90 Relative Strength Index (20.7268) 90

80 80
70 70
60 60
50 50
40 40
30 30
20 20

Oct Nov 2001 Mar Apr May Jun Jul Aug Sep Nov Dec 2002 Mar Apr May Jun Jul Aug Oct Nov 2003 Mar Apr May Jun Jul Aug Sep Nov Dec 2004 Mar Apr
 Beating the Street
• Don’t invest in companies you don’t understand.
• Learn as much as you can about the companies you
invest in.
• Don’t get scared out of the market by rumors and
general gloom and doom.
• Hang out at shopping malls to uncover investment
opportunities.
• Be patient for a stock fulfill its potential.
• Don’t let the HERD influence you into buying the same
stock everyone else is buying.
• Enjoy the DOWNTURNS in a market for what they are –
a bargain hunter’s delight.
 Stock picking
• Stick to what you understand
• Do your homework
– Use the same methods of investigative reports
• You have an advantage: Use it
– Use your connection and network for
information.
 Prepared By:
Jonathan L. Ravelas,
Banco De Oro
Tel: (632) 858-3145
Email: ravelas.jonathan@bdo.com.ph

--------------------------------------------------------------DISCLAIMER-------------------------------------------------------------
This document is based on information obtained from sources believed to be reliable, but we do not make any
representations as to its accuracy, completeness or correctness. Opinion expressed are subject to change without
prior notice. Any recommendation contained in this document does not have regard to specific investment
objectives, financial situation and the particular needs of any addressee. This document is for the information of
the addressees only and is not to be taken on substitution for the exercise of judgement by the addressees. Banco
De Oro accepts no liability whatsoever for and direct or consequential loss arising from any use of this publication.
This document is not be construed as an offer or solicitation of an offer to buy or sell securities. In the course of
our regular business, we may have a position in the securities mentioned and may make purchases and/or sales of
them from time to time in the open market.
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