The technical analysis the case of stock code drc da nang rubber joint stock company, viet nam,masters thesis

BERLIN SCHOOL OF ECONOMICS AND LAW Institute of Management Berlin 1MB THE TECHNICAL ANALYSIS: THE CASE OF STOCK CODE DRC - DA NANG RUBBER JOINT STOCK COMPANY, VIET NAM Name of Stude

BERLIN SCHOOL OF ECONOMICS AND LAW

Institute of Management Berlin (1MB)

THE TECHNICAL ANALYSIS: THE CASE OF

STOCK CODE DRC

- DA NANG RUBBER JOINT STOCK COMPANY,

VIET NAM

Name of Student THAO DUONG PHUONG Matr No: 582573

MASTER'S THESIS Submiited in partial fulfiment for the degree of

"MASTER OF ARTS"

Supervisor 1: Prof Dr Stachuletz Rainer Supervisor 2: PhD Tran Thi Xuan Anh

THE TECHNICAL ANALYSIS: THE CASE OF STOCK CODE DRC

- DA NANG RUBBER JOINT STOCK COMPANY, VIET NAM

Thao Duong P/i uong

Abstract

This paperwork studies about the technical analysis of securities for a sample of a stock code named DRC, presented for Da Nang Rubber Joint Stock Company, which was listed on Ho Chi Minh Stock Exchange (HSX) in Viet Nam in 2006, for the time from 2006 until now The paper identifies that some of the hypotheses presented by the optimal heding literature are possible

to illustrate the technicians' experiences on investment in the stock market in Viet Nam, especially investing in stock DRC in recent years Moreover, the paper shows that the macroeconomic effect of technical analysis on investment's behaviour in Vietnam

market has applied a lot suitable legal corridor and modern techniques, and helped to eliminate negative factors in the domestic economy

In particular, that stock market of Vietnam is growth well has promoted the playground of those who are interested in investment and financing Yet

they are not sastified if there are no beneficial supporting tools to recommend and advise the investment The global open knowledge can fulfill all the chasm, and a lot of techniques are used nowadays in stock trading, and

securitiy players has started to invest money by analyzing data wisely However, to make the decision when there is doubt of using which specific analysis method becomes a big question The introduction of technical analysis in stock market is mentioned in my thesis, especially using this in the case of a popular traded stock in Vietnam, then offers to investors a useful preference

The aim of my thesis is to contribute to knowledge in this economic

area by selecting technical market analysis, then provide recommendation for potential investors

In the details, I propose to to employ main methods of analysis to

support my own thesis conclusion

1 Definition and characteristics of technical analysis

2 Features of technical indicators and chart patterns

3 Research of stock trading performance that using technical analysis

4 Statistics, analytical review and synthesis

5 Limitation and conclusion

The thesis brings the main methodology with analysis techniques, descriptions, comparison, deduction and provision

analysis Specially, I take this opportunity to thank the one having big

influence on me from FAMA 5- Vietnam, Prof Dr Stachuletz Rainer In

addition, thank Professor for his supervision throughout the course of my master's degree and Mrs Tran Thi Xuan Anh for providing me invaluable

advice on my subject The foundation of my paper would be vague without all

of their support

I also would like to thank all my friends in my master's course for their mutual support and spiritual encouragement

The last, I am grateful to my parent's scarif' to give me the chance of

pursuing academic path Without them, my paperwork could not become existence

1 Introduction of Danang Rubber Joint Stock Company (DRC) 16

LIST OF FIGURES

Figure 1 Model trend of International Business Machines (IBM) from Oct

Figure 3 Stock closing prices of Eastman Kodak Co from Nov to Dec 1999

Figure 4 Stock closing prices of Eastman Kodak Co from Nov to Dec 1999

CHAPTER I INTRODUCTION

1 Overview

The stock market in Viet Nam has developed in recent years, especially

in the latest 5 years The operation of stock market is getting gradually

dynamic and attracts more and more investors not only domestics ones but

also foreigners This has attribute the vast volumes in trading and created a strong healthy playground for those who are interested in the finance's

investment in Viet Nam Remarkably, the number of investors, employees using of technical analysis in the stock market activities is signigicantly escalated

The technical analysis method as well as the fundamental analysis way

are more and more popularized in security investment in the world for centuries Then both of them are applied in the daily stock trading in Vietnam

as timely catching-up trend by Vietnamese investors in the desire to build up domestics finance as a remarkable point in area's economy and in the world Moreover, the technical analysis is preferred and approached to use broadly in

recent decades, possibly due to the fact that using fundamental information to determine value of assets has become notoriously difficult However, the effective of its application in Vietnamese stock market is not yet fulifilled because of that the use of security analysis method is not consistent and coherent Investors are confused to adopt new methodology in specific cases,

and the information in Vietnam is not transpatent enough to manipulate analysis tools in practice Furthermore, the flaw of existent literature is that most previous papers analyze the fundamental analysis over than the others, and experts bring bias in argument to the modern technical analysis in application in Vietnamese stock market Therefore, this paper would discuss primarily about technical analysis which is encourageed to broaden and apply

much frequently as a effective investing method in Vietnam I also hope to mention about the strengths and weaknesses of it here From my point of view, it helps invesotrs, vendors, and speculators and managers have right consideration about techinical analysis in the Vietnamese stock market and

make their own exact decisions

As the result, the thesis is named "The Technical Analysis: The case of

stock code DRC — Da Nang Joint Stock Company" By picking up a stock code DRC, which was listed in 2006 by Ho Chi Minh Trading Stock Center

(HSX), I decide this stock have many characteristics of a Vietnamese State Capitalization Company, a Manufacturing as well as Importing-exporting Company and a rubber tire industry with the precursor of a heavy industrial

organzation in Vietnam established in 1975 What is shown about DRC stock

trading by technical market analysis?

Finally, the research question is raised that "Is it possible to make

profitable investment decision based on Technical Analysis?" was answered

by the results of the thesis Retail potential investors want to increase benefits and create many strategies to analyze market with both pattern recognitions

and statistical indicators Growing awareness of technical analysis on the financial market in the recent years has been motivating the demand of

exploring more deeply its advantages and eliminating any disadvantages of technical market analysis tools By this way, investors or traders can optimize

their profits

2 Methodology

In order to achieve the aim of the thesis, I used methodologies of statistical analysis, description, synthesis, comparison and probability To generate last recommendation, statistical probability analysis method is taken

to explore opportunity of investment based only on teclmical market analysis

Elements of methodologies are essential to identify the relationship between the literature of analysis and stock market practicing Financial

markets, and stock market in particular, are illustrated with complex data input and interesting technical indicators

A different method used in my thesis is "description" This one kind of method presents details of information and characteristics of all the subjects

given in the thesis Significantly, description method is heavily used in first chapters, chapter on theory of technical analysis where it describes

background of stock market and investors' behavior in using technical analysis

Another method "synthesis" helps to link the constituent perspectives into the whole complex data output This method is used for the last part of

the thesis where findings shown during the research are elaborated and synthesized

CHAPTER II TECHNICAL ANALYSIS

1 Theoretical Background

There are two main methods used to analyze securities and make investment choices: fundamental analysis and technical analysis The first one relates to financial statements of companies to determine fair value of business, while the second way assumes that price of stocks already reflects

all public information and focuses on statistical analysis of price movements

1.1 Definition

This kind of analysis involves statistics of market activity, such as price and volume The security's intrinsic value is not attempted to measure but rather, technical skill uses charts, and other tools to identify patterns that can

be applied as a basis of investment decisions

In other words, technical analysis method is based on the fluctuation of price as well as models of numbers like price, trading volumes , in order to foresee the price's trend in the future It is preferred by free traders, speculators, and short-term investors So buyers keep stocks in few days, then

sell them out Methodology of technical analysis is related to statistics investigation, like Indicators RSI (Relative Strength Index), MACD (Moving Average Convergence-Divergence), Oscillator, and some rely on chart

patterns and the combination of techniques Unlike the basic ones, technical analysts do not concern securities with valuation, the only matter they care is past trading data and what information the data might be provide about future price trends

In several years, based on the foundation of Dow Theory, technical analysis has developed and stated out three assumptions:

- Price discount everything

- Price moves in trends

- Price tends to repeat history in the future

• Price discount everything

A number of experts agree that technical analysis ignores fundamental factors and only focuses on price trends, brings analysts' bias The other sides are based on the "Effective Market Hypothesis", which demonstrates that a

stock's price already shows everything about a company, including fundamental factors Market psychology is witnessed by technical analysts

So, instead of investigating factors separately in various kinds of financial statements to make decisions, experts only consider price movements as the product of supply and demand for a particular stock in the market

• Price moves in trends

It is believed that price move in short-, medium-, and long-term trend

In different words, a stock price probably more brings a past trend to happen than moves erratically Then, price movements have trending period and themselves patterns

Technicians think it is possible to rely on different timeframes, identify trends and invest money with trading ranges However, experts also recognize

that there are periods when prices do not trend, if movements are always random, it would be really difficult to make money by using this technical tool

It is stated by Jack Schwager that "One way of viewing it is that markets

may witness extended periods of random fluctuation, interspersed with shorter periods of non-random behavior The goal of the chartist is to identify those periods (i.e major trends)."(Schwager on Futures: TechnicalAnalysis)

Figure 1 Model trend of International Business Machines (IBM) from

Oct 1998 to Oct 1999 International Business Machines (IBM) NYSE ® StockCharts.com

1-Oct- 1909 4:00pm Ooen 125.30 Hiah 125.86 Low 114.20 Last 116.52 Volume 40.6M Cha -7.17 v

The above IBM chart illustrates upward trend is interspersed with many

different trading ranges, including small trading ranges within larger uptrend The climbing movement is repeated after that the stock is breakdown in a trading range Moreover, downward trend starts the stock is under the low point of previous trading range

• Price tends to repeat history in the future

It is an assumption that history tends to repeat itself The repetitive

nature of price trends is significantly attributed to market emotions, which becomes predictable by using chart patterns to analyze these emotions and subsequent market activities to catch up trends

Interestedly, technical analysis can be applied to forecast on any security with historical trading data, including stocks, futures, commodities, fixed-income, currencies, gold, and other kind of securities In fact, technical

analysis method is used broadly, far more prevalent in financial market, for example, forex-market, derivatives-market, e.t.c, where traders focus on short-term price movements to execute their own business and make decisions

1.2 Chart Analysis

Charts are graphical representations of price data over the time The usual denominator is that price is always on the Y-axis and time is on the X-axis, in which, time can be defined by years, days, and a period of hours with

each point presenting one second Depending on the required complication of analysts, it is chosen to investigate price movements with simplified charts or more complex versions

• Overall trend

The first step of technical analysis is to identify the overall trend The

trend is meant a general direction in which a stock or market is tend to be

headed Although in one chart there are a lot of ups and downs, it is important

to state trend lines, moving averages or peak/trough points For example, the trend is seen upward going as long as price remains higher than the previous low If not, the trend will be deemed a reversed one

There are three types of trends: Uptrend, Downtrend, and Sideways! Horizontal trend The third occur when there is a little change in the peaks and troughs of a trend

In addition, trend can be classified in terms of its length, including short-term, intermediate-term and long-term Long-term movement happens

over a timeframe of longer than one year, intermediate one occur over one to three months as quarterly, and short-term trend moves over less than one

month Trends are also embedded together as a subset of time In another word, long-term trends consist of a series of intermediate ones which are created by groups of short-term trends When analyzing a chart, trends are

long-Support and Resistance lines

Support and Resistance are the next major matter after illustrating the overall trend It is recorded the familiar term "Bulls and Bears", or the struggle between buyers (demand) and sellers (supply) The term "battle lines" could be meant as the support and resistance levels where trading happen There are usually marked by a variety of trading ranges, called congestion

Figure 2 Resistance and Support Level

balance of demand and supply instead of oversupply because the more investment, the more increasing price is However, the support level could be down if the price is not exceeded the expectation line of support

- Reversal, a resistance level is showed when price is a climbing

reluctance to stop their willingness and potential investors decide to withdraw It means that increase of price is possible and it is good time to sell stocks This leads to the escalation of supply in the market and decrease of demand New balance of market is made at resistance level and stops rising

The more vendors try to get a higher price; the strength of collective selling will make prices fall If the price does not exceed the level, it is likely to

continue to arise until meet the next resistance level

In almost cases, a stock will have both of support and resistance levels

and will be traded in the range between them before breaking out higher and lower the line The breakout makes the transformation of trend lines turning over the opposite perspective and a new price channel is formed The

technicians use support and resistance levels to make specific trading decisions and identify when a trend is about to change For example, a investor can estimate the next support level and decide to buy the stock as it acknowledged that it will be likely rebound higher The direction of price is

prevailed as long as it remains between the trading congestion, and trends could be closely forecasted by technical monitors

However, market is impossible to predict exactly 100% and a break beyond the level does not lead to a reversal trend For instance, a breakout higher may be the start of a faster bullish movement, making a breakdown below trend line support Moreover, the image of "false breakout" is shown as

a instance when price may breakout to get higher tenderly on low volume and then fall back into a price channel

In my opinion, traders should be aware when place orders at support

and resistance level as its major risky points since they are really astonishing and much volatile If you are risky investors, or you feel confident to experience making a trade near these areas, take caution to call directly at the level since they are rarely reached Instead, traders can place stops or short selling orders around these levels to capitalize on a breakdown or breakout

2 Main Indicators

2.1 Moving Averages

Among the most popular technical indicators, moving averages are used to gauge the current trend's direction It is considered as a mathematical result that large data are calculated by averaging a number of past statistic points After that, the consequence is added into a chart so order that traders

can look overall smoothly data trend rather than focusing on the day-to-day price fluctuations

A moving average line is generated after values have been calculated Then, it is possible to add more than one moving average to charts by

adjusting the number of time periods used in the calculation Although these curving lines could seem to confusing and not comprehensive at first sight, it

is accustomed to catch the direction later

The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA) They are described in more detail below