LV Thạc sỹ_The magnitude of technical analysis from the professional analysts perspective in Vietnam stock market

Incontrast, Vietnam stock market has just opened up to this new trading style; thus,there are only a limited number of researches examining the practice of adoptingtechnical analysis in

BACHELOR’S THESIS

We would like to thank our instructor, Master …, for his precious guidance andsupport We couldn’t have done this research in well-organized manner without hisconstructive feedback.

We also want to thank Mr … broker at Thang Long securities, for providing usvaluable contacts that we were able to get our survey questionnaires completed withthe highest possible return rate

TABLE OF CONTENTS

ABSTRACT

LIST OF TABLES

LIST OF FIGURES

NATIONAL ECONOMICS UNIVERSITY 1

ADVANCED EDUCATIONAL PROGRAM 1

ACKNOWLEDGEMENT 2

ABSTRACT 5

CHAPTER 1: INTRODUCTION 1

1.1 Rationale 1

1 Research objectives: 1

2 Data and methodology 2

3 Research scope 2

CHAPTER 2: THEREOTICAL FRAMEWORK AND LITERATURE REVIEW 4

2.1 Theoretical background 4

2.1.1 Market action discounts everything 4

2.1.2 Price moves in trend 4

2.1.3 History repeats itself 4

2.1.4 Dow’s theory 4

2.1.5 Elliot Wave Theory 5

2.1.6 Efficient market hypothesis and random walk theory 6

2.1.7 Technical indicators in brief 7

2.1.8 Differences between fundamental versus technical analysis 15

2.2 Literature review 16

2.3 Overview of Vietnam stock market and history of technical analysis in Vietnam stock market 21

2.3.1 Overview of stock market 21

2.3.2 Overview of technical analysis 28

CHAPTER 3: EMPIRICAL RESULTS AND ANALYSIS 32

3.1.3 The commercialization of technical analysis 40

3.2 Technical trading techniques employed in Vietnam 40

3.2.1 Effectiveness of TA in price forecast in overall 40

3.2.2 Technical tools commonly in use 43

3.3 Limitations of technical analysis in Vietnam stock market, judging from professional perspective 62

3.3.1 Technical analysis 62

3.3.2 Limitations of applying technical analysis in Vietnam 63

CHAPTER 4: DISCUSSION AND RECOMMENDTIONS 66

4.1 Recommendation 66

4.2 Discussion issues 67

CHAPTER 5: CONCLUSION 71

REFERENCES 71

APPENDICES 75

the advancement of trading techniques has reached an unprecedented mastery Incontrast, Vietnam stock market has just opened up to this new trading style; thus,there are only a limited number of researches examining the practice of adoptingtechnical analysis in stock analyzing and trading Not to mention to studiesinvestigating how well fundamental approach is in the same direction with technicalscheme are just countable on one hand or even hardly found Most of studiesworking on this issue normally apply statistical method to calculate historicalreturns from Buy & Hold strategy versus technical signals to determine if technicalanalysis has any power in predicting prices and reaping up abnormal profits Thisresearch paper aims at providing a fair judgment of the practice of applyingtechnical analysis in Vietnam stock market from the professional perspective In thispaper, frequency of using technical analysis, preferred trading techniques, alongwith concurrence of results derived from technical and fundamental method areexamined one-by-one With hand-on experiences, professional technicians havemore insightful view than any others on how to make sense of these issues Theanswers collected from survey questionnaires, to some extents, demonstrate thattechnical analysis is preferable as predictive tool in the short-term and medium-terminvestment decision-making rather than longer-term In the long-term investmenthorizon, however, the squezzing role of technical analysis is observed Also, it’sobvious that probability of 100 percent of concurrence hardly occurs Yet, to someextent, these two approaches more or less find common ground to work with eachothers The technical trading rules and strategies varies from one to another,depending on preferences and experiences of professionals All in all, this paperpromisingly gives readers an overview of technical analysis application in vietnamstock market, including frequency of usage as well as effectiveness of it.

Table 3.1: % win of 6 random companies with their prediction for VN-Index 42

Table 3.2: multiple using chart habit of 30 technical analysts 48

Table 3.3: what chart is combined by technical analyst when they use just 2 charts? 49

Table 3.4: what charts are combined by technical analyst when they use just 3 charts 50

Figure 2.1: Elliot wave (Source: stockchart.com) 5

Figure 2.2: Elliot wave – three rules (Source: stockchart.com) 6

Figure 2.3: Elliott wave – 3 guidelines (Source: stockchart.com) 6

Figure 2.4: Sensitivity of a variety of Moving Average (Source: stockchart.com) 8

Figure2.5: ROC with ANF index (Source: stockchart.com) 9

Figure 2.6: CCI with CAT index (Source: stockchart.com) 10

Figure 2.7: RSI with WFR index (Source: stockchart.com) 11

Figure 2.8: MFI with JBNT index (Source: stockchart.com) 12

Figure 2.9: William % R with IBM index (Source: stockchart.com) 13

Figure 2.10: MACD with PHM index (Source: stockchart.com) 14

Figure 2.11: highest and lowest point of VN-Index and HNX-Index (Sources: HOSE) 24

Figure 2.12 : VN-Index for 5 year 2007-2012 (sources: HOSE) 30

Figure 2.13: Technical analysis of Au Viet securities companies in 21-7-2010.(sources: Au Viet) 31

Chart 3.1: frequency of using technical analysis amongst professional analysts 32

Chart 3.2: frequency of using technical analysis in short-term 33

Chart 3.3: Frequency of using technical analysis in medium-term 34

Chart 3.4: Frequency of usage in long-term (major phase) 35

Figure 3.1: Metastock chart of SSI index 01/04/2010 (sources: Saga) 45

Figure 3.2: Amibroker chart of SSI index 01/04/2010 (sources: Saga) 46

Figure 3.3: Compare bar and candle Sources: VBSC 49

Figure 3.4: Fibonacci with VN-Index at % rate (sources: MSWing.net) 52

Figure 3.5: Elliott wave I with VN-Index in 2003 (sources: MSWing.net) 53

Figure 3.6: Elliott wave with VN-Index from 2003-2011 (sources: MSWing.net) 53

Figure 3.7: MACD with SSI index (source: Vietstock) 56

Figure 3.8: Bollinger Band with KDC index (sources: Vietstock) 57

Figure 3.9: SMA with REE index (sources: Vietstock) 58

Figure 3.10: PSAR with REE index (sources: Vietstock) 59

CHAPTER 1: INTRODUCTION 1.1Rationale

Technical analysis has been emerging as commonly used tool in Vietnam stockmarket where, for long time, people already got familiar with fundamentalapproach Technical approach in financial world is not brand-new thing in advancedmarkets like US, Tokyo, London, etc., but it was introduced in Vietnam as recently

as five years ago Since technical analysis has been catching on, the number ofinvestors and professional analysts who have understanding on this method is onthe rise This phenomenon leaves questions: what’s so captivating about technicalanalysis? Does it really work for Vietnam stock market which is far more fromwell-functioning markets in sophisticated financial hubs in the world? No one cantell with 100% certainty either fundamental approach or technical one is superior tothe other Depending on distinct situations and conditions, the analyst chooses oneover the other or wisely makes the most of both On the one hand, fundamentalanalysis involves the computation of intrinsic values by using proximate futureestimations Unfortunately, these future indicators are subject to alteration due to itsinherited unpredictable and opaque nature of information disclosure in Vietnam Onthe other hand, technical analysis gives no room for financial statements ofcompanies Rather, it spends a great deal of emphasis on making sense onprevailing trends and signals Put all the details aside, while fundamental is aforward-looking approach, technical method pays attention to the past behavior Inthis paper, we are not going to dig deep in the theoretical sphere which can be

referred to academic textbooks, but revolve on the magnitude of technical analysis

from the professional analysts’ perspective in Vietnam stock market

1 Research objectives:

- Understanding the demographic background of respondents (male, female, age,

years of experience, and educational attainment, etc

- Understanding the frequency of usage of technical analysis in stock investment

- Understanding the strategies employed by Vietnam professional technicians

2 Data and methodology

Historical data and market prediction are obtained from official websites ofsecurities firms in Vietnam Along with empirical data collected from the websites,the survey approach is exerted in order to yield extraneous educated opinions fromprofessionals as well as common practice of technical analysis in Vietnam Weattempt to compare and contrast views of professionals with results from empiricalanalysis Technical analysis is the work-of-art, thus, interpretation is subject to bebiased Also, empirical data are not directly available to serve that job

Of total 60 survey questionnaires sent out, 45 questionnaires were responded andcompiled, resulting in return rate of 75% (we will provide the survey questions andsome of the personal information of surveyors in part 2 and 3 of the appendices,since some of them don’t want to public, we just present 21 surveyors) Most ofrespondents are technicians, the rest are fundamentalists with some technicaltrading background In this instruction, participants are required to fill out thequestionnaires individually The respondents are asked to determine the importance

of technical analysis in forecasting future price movement across three tradinghorizons, ranging from intraday to longer than one year

There is also a collection of historical data from six securities firms over 30-weektrading horizons to prove whether they got correct direction of market movementsbased on technical analysis

3 Research scope

The matter we want to address in this research is narrow down in how technicalanalyst uses technical analysis, and how important technical analysis in Vietnammarket at this moment In other words, what we try to figure out is the using level

or frequency and the magnitude of technical analysis among technical analyst.Thus, we don’t research about how effective technical analysis is and how muchreturn it bring about, because it’s another story to tell Due to the shortage of timeand the contacts, we decided to focus the research on the technical analysts only.Also, Hanoi is the area of interest since it is where the available surveyors reside

The research’s quite narrow, but it does give readers a concrete view about thetechnical analysis’s usage in Vietnam, which no research before providing

CHAPTER 2: THEREOTICAL FRAMEWORK AND

LITERATURE REVIEW 2.1 Theoretical background

Technical analysis bases on three underlying principles:

2.1.1 Market action discounts everything

This statement is regarded as a cornerstone of technical analysis Unless it’s welldiscerned, everything else followed would be pointless Since everything such aspolitics, policies, psychology can be reflected on the market price, the technicianbelieves it’s enough to study price action only

2.1.2 Price moves in trend

The main purpose of technical analysts is to identify and follow existing trends atearly stage until the market show signs of incoming reverses The price in motionshould keep moving in the direction until any external force causes it to change ordeviate from prevailing direction

2.1.3 History repeats itself

To some extends, studying market action is closely related to study of humanbehavior in responding to the market; that is market participants seem to stick to acertain responsive pattern unconsciously Even a new condition may call for abrand-new strategy, market involvers tend to refer to what works well in the past toapply for a current circumstance Therefore, the future is supposedly the repetition

of the past

2.1.4 Dow’s theory

Dow’s theory is perceived as a fundament of technical analysis The theory attempts

to recognize the existing trend, not foretell the trend Primary or major trend consists

of three phases: accumulation, public participation, and distribution phase Secondarytrend and minor trend are corrective phases of larger trend or major trend.

Volume is to confirm or oppose the trend was recognized: In the uptrend, volumeshould expand as price rally and diminish as price goes down Conversely, in thedowntrend, volume is expected to increase as price drop and decrease as price being

up

Percentage retracement in Dow’s theory includes three important levels: 50%,

33%, 66%, while in the Elliot Wave theory or Fibonacci ratios, this numbers are38% and 62% To combine two approaches, we have the minimum retracement of33% to 38% and maximum retracement of 62 to 66%

2.1.5 Elliot Wave Theory

Pattern, ratio, and time are three most important components of Elliot Wave Theory.Pattern here refers to wave patterns and formations Ratio is useful in determiningretracement point and setting up price objectives by analyzing relationshipsbetween different waves Time is for the purpose of confirmation of wave patternand also the least important factor comprising the principle Accordingly, regardless

of size of the wave, there must be repetitive sequences of waves: 5-wave impulsesequences, and 3-wave correction sequences

Figure 2.1: Elliot wave (Source: stockchart.com)

Extraneously, three strict rules can’t be discounted

Rule1: Wave 2 is not able to retrace more than 100% of wave 1

Rule2: Wave 3 can never be shortest of the three impulse waves

Rule3: Wave 4 can never overlap wave 1

Figure 2.2: Elliot wave – three rules (Source: stockchart.com)

Apart from three rules which hold true all of the time, there are three guidelinesholding true most of the time they are tested

Guideline1: in case wave 3 is the longest, wave 5 and wave 1 are approximatelyequal

Guideline2: wave 2 and wave 4 formations are alternate, in which wave 2 is sharpand wave 4 is flat correction

Guideline3: After wave 5 impulses, ensuing waves (a, b, c) end up in area higherthan wave 4 low

Figure 2.3: Elliott wave – 3 guidelines (Source: stockchart.com)

2.1.6 Efficient market hypothesis and random walk theory

It’s worth mentioning in brief the efficient market hypothesis and random walktheory which call into question the validity of technical analysis Both assume that

the extremity of the market leaves investors/ traders with no opportunity to makeabnormal returns for technical analysis, or even fundamental method

According to Random Walk Theory, there’s no underlying pattern for stock price;all the moves and countermoves in the market are considered as “random-walks”.Put it another way, there’s no way one can seek clues of the future marketmovement from the understanding of the past price patterns All price actions arerandom; thus, technical analysis which uses price to predict price is total pointless

As the technical trading techniques heavily rely on past prices, this dependence onthe past price calls into question how powerful the past prices are in predicting thefuture market movements

Market efficiency refers to how responsive and sensitive price in competitivemarket is to news and updated information The Efficient Market Hypothesis statesthat all alterations occurred in stock price are the reflection of informationimmediately and soundly applied Because the price change is solely attributed tonews and information regarding the stocks, technical analysis has no predictivepower Nevertheless, there are two subjections that cast doubt on the theory First,Efficiency Market Hypothesis assumes the availability of information and thesimilarity of information interpretation Second, the theory surmises all investorsare rationale Both assumptions are only found in an imaginary world and unlikely

to exist in the real-world complexity, since information interpretation and decisionmaking are subject to bias Herding and over-confidence due to lack of pertinentinformation are usually the case Hence, technical analysis has power in makingforecast, at least to some extents

2.1.7 Technical indicators in brief

A multiple trading system and indicators is used to determine if the price is trending

or trading in horizontal band The common approach practice covers the use oflagging indicators for the trending market and leading indicators for trading market.The following section is dedicated to explain some commonly used lagging andleading indicators

2.1.7.1 Trend-following indicators

 Moving average simple & exponential

The most commonly used tool in technical analysis is moving average due to itssimplicity in calculating procedure and prescient herald interpretation The n-periodmoving average is computed by adding up the n most recent data, say closingprices, then dividing by n This average is recalculated by dropping the oldest date

in n period and adding the latest one The larger the data, n is, the smoother themoving average is The moving average follows a market and demonstrates thattrend has begun, but only after the fact, thus, moving average is a kind of laggingindicator Due to trend-following nature, the moving average doesn’t work well intrendless period or trading range price or in situation which market trades in ahorizontal price band

Short term MA captures the price action more closely and more sensitively thanlong term one Put it another way, short-term MA is more sensitive to the priceaction than longer one Depending on the purposes and objectives of technicians,some favor the short-term moving average to grasp timing market reactions, othersemploy longer-term ones to create smoother ones and avoid whipsaws or deceptivesignals Sensitivity of a variety of Moving Average is put as following order: SMA<WMA< EWMA

Figure 2.4: Sensitivity of a variety of Moving Average (Source: stockchart.com)

Common methods in use:

• SMA: Price lies above MA during ensuing rallies and below during the

setbacks

• Double crossover method: sell sign produced when shorter MA crosses below

longer MA, and buy signal occurs when shorter MA cross above longer one

2.1.7.2 Oscillating indicators

Oscillators are useful when market fluctuates in the horizontal price band, or tradingrange Not only can oscillators work well in trendless market, but in trendingmarket Because oscillators are leading indicators, they are looked upon asimplications for forecasting signals

There are three situations when oscillators are extremely useful:

 Reaching upper and lower threshold of its boundaries, or so-called overboughtand oversold

 Divergence between price and oscillators can give important warning sign

 The cross of the zero (midpoint) line can give important trading signal indirection of price trend

Figure2.5: ROC with ANF index (Source: stockchart.com)

 Commodity channel index

Generally, CCI measures the current price level relative to an average price levelover a given period of time

CCI =

TP: Typical price = (High + Low + Close)/3

Constant: 0.015

Figure 2.6: CCI with CAT index (Source: stockchart.com)

 Relative strength index

RSI is a momentum oscillator that measures the speed and change of pricemovements RSI is considered overbought when above 70 and oversold whenbelow 30 Signals can also be generated by looking for divergences, failure swingsand centerline crossovers RSI can also be used to identify the general trend

RSI=

RS = Average Gain / Average Loss

First Average Gain = Sum of Gains over the past 14 periods / 14

First Average Loss = Sum of Losses over the past 14 periods / 14

Figure 2.7: RSI with WFR index (Source: stockchart.com)

 Money flow index

As a volume-weighted version of RSI, the Money Flow Index (MFI) can beinterpreted similar to RSI

MFI =

Money Flow Ratio = (Positive Money Flow) / (Negative Money Flow)

Positive Money Flow = ∑ positive raw money flow over 14 period

Negative Money Flow = ∑ negative raw money flow over 14 period

Raw money flow = Typical price * Volume

Typical price = (High + Low + Close)/3

Figure 2.8: MFI with JBNT index (Source: stockchart.com)

 Stochastic (K%D) fast & low

The Stochastic Oscillator measures the level of the close relative to the lowest-lowrange over a given period of time The main line is called %K The second line,called %D; the % D is a moving average 3 of %K A smoother version of the rawstochastic (%K) is known as %D, which is essentially the moving average 3 of %

K An even smoother version is %D-slow, which is the moving average 3 of %D

We therefore have two stochastic indicators:

1 Fast stochastic (%K and % D lines)

• Fast %K = %K basic calculation

2 Slow stochastic (%K and %D-slow lines)

3 Full Stochastic Oscillator:

%D = 3-day SMA of %KLowest Low = lowest low for the look-back period

Highest High = highest high for the look-back period

%K is multiplied by 100 to move the decimal point two places

 William R%

William %R is a momentum indicator that is the inverse of the Fast StochasticOscillator Unlike Stochastic Oscillator, William %R reflects the level of the closerelative to the highest high for the look-back period.

Lowest Low = lowest low for the look-back period

Highest High = highest high for the look-back period

%R is multiplied by -100 correct the inversion and move the decimal

Figure 2.9: William % R with IBM index (Source: stockchart.com)

 MACD use two exponential moving average

o The faster line is the difference between (12 and 26 days or weeks)

o The slower line is usually 9 period exponentially smoothed average ofMACD

o A crossing by faster line above slower line gives a buy signal and viceversus

MACD = EMA (CLOSE, 12) – EMA (CLOSE, 26) Signal Line = EMA (MACD, 9)

As its name implies, the MACD is all about the convergence and divergence of thetwo moving averages The occurrence of convergence is when the moving averages

move towards each other Divergence takes place when the moving averages moveaway from each other The shorter moving average (12-day) is faster andresponsible for most MACD movements The longer moving average (26-day) isslower and less reactive to price changes in the underlying security.

Figure 2.10: MACD with PHM index (Source: stockchart.com)

 Moving average difference: histogram bar measures different of dual

moving average combination; short and long term MA

 MACD histogram -> turns earlier than the crossover signals, giving traders

some advanced warning

Histogram= MACD – Signal Line

2.1.7.3 Market indicators

Unlike other indicators, which comprise one single security price in computation,market indicators are yardsticks for all securities in a specific market As implied bythe name, market indicators measure the entire stock market rather than individualone These indicators equip users with well-reflected information rather than priceand volume Market indicators fall under three headings: pecuniary, sentiment,momentum

 Monetary indicators usually refer to some macro-economic barometers

such as interest rate, inflation, the overall money supply, etc.,

 Sentiment indicators are none other than expectation of market participants

 Momentum indicators for the market as a whole.

• The gap between today’s high and low

• The gap between yesterday close and today’s high

• The gap between yesterday close and today’s low

High average true range is likely in panic selling pressure market, low one is foundwhen market trades sideways

 Bollinger Band is different from moving average envelope in the sense that

the distance between two lines generated from the volatility of the price measuredthrough standard deviation

2.1.8 Differences between fundamental versus technical analysis

Even both techniques aim at serving one purpose of forecasting which direction ofmarket would be likely to follow They differ in a myriad of ways Fundamental

analysis involves examining all relevant factors to determine the intrinsic value of

the stock Fundamentalists assume that all price movements are just random-walksaround the intrinsic value In the meantime, technicians believe all fundamentalfactors are already contained in the market price, thus, study sole price action isalready sufficient Other than that, technical approach is advantageous in term oftiming It accounts for short term even on daily basis change while fundamentalsrarely change in day-to-day trading basis

From technician perspectives, the technical indicators lead the known fundamentals,but important market moves must be initiated by fundamental factors Whathappens fundamentally can be used to justify market moves on price charts.

From fundamentalist point of view, they can use computer trend-following systemthat prevents them from assuming the position against prevailing trend Someunusual on the price chart can alert fundamentalists to reexamine fundamentalsituation closer and more carefully

2.2 Literature review

The purpose of this section is to review the evidence of profitability of technicalanalysis in the previous studies both inside and outside Vietnam stock market.Numerous empirical studies have tested the effectiveness of technical analysis forthe purpose of uncovering the profitable trading rules or testing market efficiency.Those studies aim to dig deep into different practitioners’ perspectives

Study of Smith in 1965 examined the behaviors of non-professional traders in the

US commodity market in 1961 In this survey, of all respondents, 53% claimed that

they used chart frequently in order to define trend The chartist tended to trade morecommodities in comparison with the non-chartist The 10% chartist, compared with24% of non-chartist always took long positions

While the study above testifies the behavior of individual traders, the Group of

Thirty (1985) provided interesting results on institutional respondents which is

composed primarily of banks and securities houses in 12 countries The study

uncovered the view of market participants on the function of the foreign exchangemarket in 1985 The survey results that there are 97% of bank respondents and 89%

of securities houses believed the use of technical analysis had an enormouscontribution on the market The research also indicated market reacts more swiftlyand aggressively to the short-term trend and turn attention away from fundamentalfactors

Treynor and Robert Ferguson (1985) attempted to prove knowing the

historical price patterns, in conjunction with firm-specific valuable information,

is able to make abnormal profits

The Brorsen and Irwin (1987) gave a great deal of emphasis on the large public

futures funds’ advisory groups in 1986 Judging from the results of the survey, more

than half of advisor answered that they relied tremendously on the computer-basedtechnical trading scheme

Frankel and Froot (1990) showed that switching a forecasting method for another

over time may explain changes in the demand for dollars in foreign exchange markets The yearly survey results of Euro-money magazine were conducted on between 10 to 27 foreign exchange forecasting firms According to the results, in

1978, eighteen forecasting firms used fundamental analysis and only two firmsapplied technical analysis After 1983, however, the position had been reversed In

1985, only one firm reported using fundamental analysis, while the number of firmsusing technical analysis is twelve In1988, seven firms appeared to rely onfundamental analysis while eighteen firms employed technical analysis.Undoubtedly, technical analysis has become prevalent and gained its popularityovertime

In the U.S stock market, Lo and KacKinlay (1988) found positive autocorrelation

of weekly returns on NYSE stocks Brock, Laklonishok and LeBaron, BLL,

(1992) reported that moving average and trade rank break demonstrate the

predictive power in the Dow Jones Industry Average (DJIA) Similarly, Gencay(1996) discovered strong evidence of nonlinear predictability in the Dow Jonesindex

Taylor, Mark P and Helen Allen (June 1992) conducted a survey on the use of

technical analysis among chief foreign exchange dealers in the London market in

1988 The results indicated that 64% of respondents reported using moving

averages and/or other trend- following systems and 40% reported using othertrading systems such as momentum indicators or oscillators These results indicate ahigh frequency of applying technical trading systems in foreign exchangespeculation In addition, approximately 90% of respondents reported that they wereusing some technical trading techniques in formulating their short-term tradingactivities (intraday to one week) Judging from this figure, technical scheme appear

to be pervading in short term Also, the survey showed 60% of respondents viewingtechnical analysis on equal footing with fundamental analysis.

The study of Brock, Lakonishok, and Lebaron (1992) demonstrates that

relatively simple technical trading rules have power in forecasting Dow JonesIndustrial Average over a long sample period Two common trading rules weretested: dual moving average or variable length moving average and trading

range break-out (resistance and support levels) The finding of study strongly

support the idea of visually searching past price patterns as indicators for future stock price changes.

Kelly and Brown (1994) categorized technical trading rules under four

sessions: (1) contrary opinion rule (such as credit balances in brokerage house, mutual fund cash positions, investment advisory opinions); (2) follow smart

money rule (such as confidence index, short sales of specialist, T-bill Eurodollar

spread, debit balances in brokerage accounts; (3) market environment indicators

(short interest, breath of market, stocks above 200-day MA, or block uptick or

downtick ratios; (4) stock prices and volume techniques (Dow theory, Elliot wave theory, resistance and support level, MA, chart patterns, etc.,

For the other stock markets, Hudson et al (1996) applied the moving average and

trading range breakout rules in the UK stock market to conclude that technical trading rules have predictive ability, given sufficiently long series of data are considered.

Menkhoff (1997) investigated the behavior of foreign exchange professionals such

as dealers or fund managers in Germany in 1992 His survey revealed that 87% of

the dealers placed a weight of over 10% to technical analysis in their decisionmaking The importance of technical analysis appeared to be 35% on average andother professionals also showed similar responses Respondents believed thattechnical analysis influenced their decision from intraday to 2-6 months by giving aweight of between 34% and 40% Other interesting findings were: First,

professionals preferring technical analysis were younger than other participants; secondly, there was no relationship between institutional size and the preferred use

of technical analysis; and finally chartists and fundamentalists both indicated no

significant differences in their educational level.

Oberlechner (2001) reported findings from a survey on the importance of technical

and fundamental analysis among foreign exchange traders and financial journalists

in Frankfurt, London, Vienna, and Zurich in 1996 For foreign exchange traders,

technical analysis is regarded as a more reliable forecasting tool than fundamentalanalysis up to a 3- month forecasting horizon, while for financial journalists itseemed to be more important up to 1- month However, forecasting techniquesdiffered in trading locations on shorter forecasting horizons From intraday to a 3-month forecasting horizon, traders in smaller trading locations (Vienna and Zurich)placed more weight on technical analysis than did traders in larger trading locations

(London and Frankfurt) Generally speaking, the combination of both

technical and fundamental analysis is preferable choice in their trading practices

Kwon and Kish (2002) dig deep into the NYSE value-weighted index to confirm

that technical trading rules (the simple price moving average, the momentum, and

trading volume) were more profitable than buy and hold style.

Lento (2007) examined the effectiveness of a variety of technical trading rules in

eight Asian-Pacific stock markets (i.e Vietnam is not included) In the study, a naive

buy-and-hold strategy and technical trading scheme were compared, resulting intechnical trading rules are more profitable in most of the markets except the Nikkeiand the All Ordinaries

Venkatest and Madhu Tyagi (2010) surveyed on the use of fundamental and

technical analysis in taking position in companies with various sizes: large-cap, cap, and small-cap In the survey, more than 79.8% of respondents stated that they

mid-used both fundamental and technical approach to take positions in capital market Indealing with investment decision towards large-cap companies, more than 55.3%chosen technical analysis, while 50.6% favored fundamental method over technical.These numbers in mid-cap and small-cap companies also are equally preferred This

evidence shows that fundamental and technical analysis should go hand in hand in

investment decision-making in large-cap companies They tend to use both charts and fundamentals in complementary manner More interestingly, the findings of research also reveal that they rely on technical analysis when market is optimistic,

and fundamentals when market is pessimistic.

In summary, many recent empirical works have shown the usefulness oftechnical analysis in predictability and profitability in stock markets globally.Technical analysis has gained ground amongst market involvers Regardingforecasting horizons, technical instruments have become dominant in short-term

in relation to fundamentals

On the contrary, there are a number of studies going against technical analysis orcasting down on its predictive ability Those researches have proven the diminishingrole and declining importance of technical analysis amongst market participants

The stuties of Fama and Blume (1966) and Jensen Bennington (1970) brought to

conclusion that technical trading rules are not more powerful in reaping upabnormal returns

Dooley and Sharp’s study (1976) casts down on that the profitability of technical

analysis may deteriorate over time

In Vietnam, the number of studies regarding the power of technical analysis has

been on the rise Yet, the empirical researches on this field is still limited in terms ofquality and quantity, since Vietnam stock market is at nascent stage of developmentand technical approach is still new amongst traders

The research (2006) of My Chau Bui tested the weak-form efficiency of Vietnam

stock market The research applies technical analysis to the Vietnamese stock index

to compare whether technical trading can outperform the buy and hold strategy that the support of efficient market hypothesis recommends.

Despite the long-standing root of technical analysis in advanced financial markets,it’s seen as a new tool in Vietnam Since Vietnam stock market made the first debut

in July, 2000, technical analysis in Vietnam has absolutely no longer than that As amatter of fact, technical term was just introduced in Vietnam as recently as fiveyears or so Therefore, practice of using technical analysis has not been as popular

as it is in long-standing financial markets in the world Also, number of researchesconcerning the effectiveness or predictive power of technical analysis is justcountable on one hand In addition, the vast majority of researches on this matter

explore the effectiveness of technical trading rules primarily from investors or

traders This research paper seeks to uncover the perceived importance of

applying financial analysis in Vietnam stock market, judging from professional analysts’ point of view by supplying survey-based evidence This paper strives for

offering insight into professional analysts’ preferred trading style, thus, fills the gap

of research on Vietnam market with respect to technical analysis

2.3 Overview of Vietnam stock market and history of technical analysis in Vietnam stock market

2.3.1 Overview of stock market

We will review the period of 12 years of security market from 2000-2012 first, thenmove on to the study about the Technical analysis’s history in Vietnam

2.3.1.1 Regulations

From the day 29/06/2006, the Securities Law was passed by the National Assemblyand officially took effect in 01/01/2007, the securities market gradually eliminatesthe conflict occurred with other legal documents – especially with the EnterpriseLaw and Law on Investment- not only in Vietnam but in international business.Thus, this change in policy provide a better foundation for Vietnam SecuritiesMarket to access foreign funds, increase transparency and enhance the supervision’sability for the government’s institutions The payoff time, T+2, is the most excitinganticipation by the investor in the history After many delays, the State SecuritiesCommission of Vietnam finally submitted the proposed draft to the FinanceCommittee in order to implement in 2012 The circular 74 got pass which regulatethat the investors can open multiple accounts, trading in the same day carrying outdepository This will enable the competition more healthy than the time where manyentities illegally do that without the consent of State Securities Commission ofVietnam

However, with the positive change in how the Securities Market is function, thereare a lot of grits needed to throw away Basically, Securities Law is still narrow insphere of action which only contains the fundamental content and don’t embracescomprehensive activities in agreement with international practices Many Actsincluded are collapsed on each other, still not hold the same vision with other legalinstruments after many adjustments Timing of the legal execution and authenticity

is late with the expected target; further, many regulations are not provided executinginstructions…

2.3.1.2 Market scale and securities market demand

The securities market’s size has been enlarged and took more solid step in bothlong-term and middle term capital inflow function The market has contributed tothe industrialized - modernized deed of our country In the 2000-2005 periods,market capitalization was at 1% GDP Then, the scale had raised to 22,7% GDP in

2006 and continued to grow till 43% in 2007 despite of 35% GDP - Government’starget in 2010 However, under the adverse effect in the international finance marketand downturn in Vietnam economy, the securities indexes had decreasedpersistently in 2011 which made the market capitalization fall off to 32% GDP Thispullback in the market is attributable to macroeconomic turmoil such as higherexchange rate, lending interest rate, accelerating inflation rate, etc

This is top 10 companies based on their market capitalization:

Code Exchange Market cap in billion VND

The mobilized activities in Security Exchange were intensified its part for thecapital inflow with government The fund mobilization in 2009 is near 16,9% GDP.

In 2011, the total capital raised is 73,7 thousand billion VND, equal 2,6 time inrelation with 2010

However, the share issuance of many public companies still in unprompted format,not really occurs based on the capital demand of the enterprises Thus, this problemreduces the efficiency and effectiveness in utilizing the fund Further, the issuingevent just happens to be separated and not regulated in detail and depth which makethe market implicitly include lots of flaws

2.3.1.3 Public offering, securities listing and securities exchange

708 is the number of companies that is listed in both HOSE and HNX Exchangecounted at the end of 2011 Come back to 2000 when just 2 companies-REE andSAM- are listed on HOSE Exchange, yet the growth’s rate of securities market isfast and the VN-Index continuously increased to 571,04 point in 25, June 2001.However, since then the market constantly dropped for 3 years before turn back

firmly at the end of 2003 In 2005, HNX has come into operation raise the number

of listed companies to 44 with total value of 4,94 thousand billions VND.Beginning in 2006, Vietnam securities market tasted positive flavor and proved itsstable steps by both listed companies’ amount and the exchanging value

Figure 2.11: highest and lowest point of VN-Index and HNX-Index (Sources: HOSE)

1.170,67 is the highest point that VN-Index has reached in 12, March 2007 Index has arrived at 459, 36 points Getting through all of those records, the markethad sink without a break As the result, in 23, February 2009, VN-Index hadtouched the lowest trough at 235 points, while HNX retained 55,27 points in Jan 9

HNX-2012 In the beginning of 2011, VN-Index from about 500 points had stepped

Highest point at 1.170,67

Lowest point at 235

Highest point at 459,36

Lowest point at 55,27

backward to 370 point at the last exchange in years Additionally, HNX-Index lost

50 point and sit in 58,44 point during 2011

Many investors sold their stock to get out of the gloomy market The liquidity ofsecurities exchanges is lessen successively, value of average exchange in 2011 justwandered around 500-600 billions VND - about 40% comparing to 2010, andestimated 10% to the most prospected period which is 5000 billion per daily trade.The market price of many stock died down hard in 2011 60% securities on bothHNX and HOSE had to accept the price under 10000 VND/share Some is evencheaper than the market’s vegetables, standing at 1000-2000 VND/ share which iscontrasted to a time when the price per share climbed to 200 - 300 thousand/ share

Chart 2.1: Proportion of stock base on price in both HOSE and HNX at

31/12/2011.Sources: vietstock

Besides, with the attempt to complete the market’s framework and keep the marketbeing systematic and under the government’s management, and narrow down openmarket, a trading system – Upcom is set up in 24/06/2009 Until the end of 2009,there are 34 stock is exchanged on this system However this organization is stillnot attractive to investors and public companies to participate

Although, after taking the entire good thing into considering, securities market stillneeds many adjusting The liquidity of the market is also a considerable problem

whenever the declining sign is presented Besides, the financial products offered isnot variable, qualified, satisfied investing demand and risk managing for theinvestor like forward, future, Credit default swap, call, put in the securities market

… In the end, especially the mandates issuing procedure is released need to be fixfor investor to be well informed and prepared

2.3.1.4 Investors

The number of investors gets bigger over the years 1,17 millions are the accountsthat opened in the securities market now from just 3000 account is created when themarket lay its first step in operation in 2000 However, the unexcited situation andnews in 2011 make the average trading value only reach 1.406 billions VND perday, which is approximated ½ of 2010 Further, our system questions how todiversified investor more and how to restructure the investing frameworks in order

to develop steadily

2.3.1.5 Financial institutions and securities services

The financial institutions and its securities services have improved quickly both inscale, skills, and the branches all over the country to serve their customers 105 and

35 are the number of securities companies and fund management enterprises thatare running business in this early 2012 When starting, the market consists of 7securities companies, even in 2004; there is still not any fund management firm Examining the circular 226 about financial safety for those financial institution, 40securities companies do not satisfy the CAR requirement and may be supervisedfrom time to time, but the list of 40 firms is not in secret for now

1400 billions VND is the total loss that 18/27 listed securities companies has report

in 9 months early 2011 Under the effect of the dull market, many securities had toaccept to quit from the Broker’s services like TrườngSơn, SME, ĐôngDương,GiaAnh, HàNội Additionally, there are enormous cases which violate the liquidity’srequirement, where investors sued the securities companies Thus, in lots of articles,

the market’s experts and managing executors have mentioned about the need torestructure

Moreover, the number of organization that stays in business and supplies financialservices for the market enlarged too fast Therefore, this issue increases the risk forentire market’s system when the capital capacity, capital efficiency and skilledknowledge are still limited, out-of-date and not matched with the mushroomingexpansion at this moment

2.3.1.6 The organization and operation of market

Although the restructure has started to fix some of the asynchronous and create forthe market more well-organized system; however, the result is not really acceptablefor the fast-forward and connected requirement of the securities market now Interm of the mechanism, separating the Stock Exchange and Vietnam SecuritiesDepository into individual entities away from State Securities Commission ofVietnam is a wise move to increase the transparency for Government to managesecurities exchanging activities and the operating activities inside the securitiesmarket

The initial form of OTC is brought into exist under the trading system – Upcom.This system barely upholds the setting-up-the-market role in the decentralized way.Beside, the number of stocks in trading comparing to the public companies’ amount

is just small and unappealing to the investors See the chart reported at 27/12/2011:

Chart 2.2: Stocks’ performance on UPCoM, sources: tinnhanhchungkhoan

we can understand the situation at Upcom when there are 93 stocks which is about71,53% actually don’t participate in trading At this moment, Upcom is still not adynamic organization to trade However, it’s an obvious result since most of publiccompanies are not that public and being inefficient.

2.3.1.7 Market management

The management’s activities in the securities market mainly focus on protecting theinvestor’s right Each of the managing policy has shown the determination tointensify the publicity and the explicitness in order to step by step apply thestandard international practices in corporate governance, accounting, auditing andthe recommendations from The International Organization of SecuritiesCommissions (IOSCO)

During 2011, along with many penalized cases about violating the informationpublishing procedures such as delayed financial reports, insider trading – totalpenalty is 4,6 billions VND 2011 is also the first year that infringing corporateadministration is charged with the personal obligation

Circular 226 about supervising the financial soundness of securities companies andfund management was passed and has effective from 1/4/2011 This regulates thehealthy of corporate operation through Capital Adequacy Ratio – CAR Thesecurities companies is considered as safe and sound if Capital Adequacy Ratio isnot smaller than 1.8 Those who break this principle will be receive tightersupervision and may be taken off the certificate to do business

Although, many achievements can be counted, the managing activities still includeweakness like law issuing process, rigid policies Further it’s still passive and out ofdate with other countries and the market developing requirement

2.3.2 Overview of technical analysis

Technical analysis appeared on the securities market quite late comparing to otherdeveloping countries, but easily take the interest of the investors From 2008-2012,

the number of people uses technical tools like chart, indicators to analyze andpredict how VN-Index or HNX-Index will perform is increased considerably,especially young investors The present of technical analysis yielded many benefit

to Vietnam securities market Whatever it brought back, there are still flaw to chewover

At the first look, investor may think technical analysis is difficult than fundamentalanalysis because it requires user to be intellective, inborn potential and passionate.Nevertheless, securities market’s true self is included enormous rumors, fakingprice, and much implicit risk that can’t be see and predict by the numbers ormodels So the efficiency of technical analysis is still a big question to us

Technical analysis made its initial appearance in VN securities market in 2003through Forex investors However, in the good phrase of market development from2006-2007, it finally is noticed In 19 October 2007, VN-Index closed at 1.097,07points In a market analysis which is showed in the media in 22 October 2007, theHanoi-Boston Group surmised that VN-Index is created a bullish flag And if thepattern is confirmed, VN-Index will reach 1.250 in November However, after thatVN-Index came into a huge pullback and just stopped in June 2008 when it scored

360 points With this mistake, Hanoi-Boston Group disappeared on the market Atthat time, there were a lot of more daring forecasting which said that VN-Index can

go up to 1500 points, even 2000 points, but Hanoi-Boston receive the most criticismbecause they used technical analysis, a new method Till now many technicalanalyst complain they get unfair treating comparing to fundamental analyst We cansay the border between intellectual, concise and deceitful, fictitious in technicalanalysis is very thin

Figure 2.12 : VN-Index for 5 year 2007-2012 (sources: HOSE)

After Hanoi-Boston group, a Singapore analyst continues to use technical to predictthe fate of Vn-Index and got good reputation from that At the end of july 2008,despite VN-Index already touch the support level at 360, but he determined thatVN-Index still on the downward trend and can be down to 300 point Lot ofinvestors didn’t agree to this anticipate, but the reality was happened exactly in theend of 2008 However after 2008, his prognostications were not right anymore, so

he was also out of VN securities market So from then, instead of listen to technicalanalysts many investors decide to learn and estimate the trend by themselves

Responding to increasing demand of technical analysis and trading rules, manysecurities companies started using technical analysis for customer’s services First,some of the securities companies supplements technical tools into their websites,and instructs how to use them Moreover, daily, weekly report on the market besideutilize fundamental analysis, these companies also add technical analysis as a guidefor their investors However, just some of the securities companies work on theanalyzing with responsibility, the others do them for self-praising, professionalclaiming, not really focusing on the benefit of their customers

Figure 2.13: Technical analysis of Au Viet securities companies in 21-7-2010.(sources:

Au Viet)

Many investors take the initiative to get their profit and technical analysis is one ofthe most effective tools to catch securities waves However, the quality of technicalanalysis doesn’t develop to match with the demand of investors, because in VNnowadays, official schools and classes is limited and the tuition is not in smallnumber Thus many people approach to technical analysis by study by themselves

If lucky, someone potential they can get an experienced, passionate master will soonbecome a high skilled analyst But if they don’t have the talent, no one instructthem, the chance to improve the skill is slim At foreign securities companies, inorder to be an employee, they have to earn CMT certificate (Chartered MarketTechnician) At VN securities market, the number of people obtaining CMT barelyexists

Unclear predict

CHAPTER 3: EMPIRICAL RESULTS AND ANALYSIS 3.1 The magnitude of using Technical analysis

3.1.1 Frequency of using technical analysis amongst professional analysts

Chart 3.1: frequency of using technical analysis amongst professional analysts

We speaded out survey questionnaires amongst professional analysts whose jobsinvolve analyzing market and making investment decision They were asked toindicate the frequency of applying technial rules in examing market and stockmovement by placing on scale ranging from 1 to 5 with 1 indicating never use, and

5 is using all of the time Of those who were surveyed, approximately 73.34%demonstated that they have used technical method with indicators and patternsalmost all of their time, since 36.67% chose 4 and 36.67% others chose 5 as theiranswers The number of analysts using technical approach in their analysis has beenexpanding at astonishing pace Judging from the response on survey, the number ofrespondents find themselves using technical trading rules haft of the time in theirself-judgement is around 20%, while this number for those who chose 2 on scale isjust 6.67% More interestingly, from this survey, we figure out no one chose 1 level

of frequency which means never refer technical analysis This showed there’s no

one approaching market without refering to technical signal demonstrated Put it another way, almost all of respondents have been using both fundamental and technical method to approach market However, the level of weight on fundamental

or techincal depends on professonals’s experiences and preferences

In order to shed more light on the effectiveness of technical analsis on variousinvestment horizon It would make more sense to break down into three investmenthorizon, following Dow’s theory: major phase, intermediate or secondary phaseinterchangably, and lastly minor phase Minor phase includes intraday trading aswell as several weeks to three months, while intermediate phase lasts from threemonths to six months These two phases play role as corrective phase to majorphase which unsually lasts more than six months These corrective trends tend tomove against the direction of major trends For example, if the market major trend

is bullish, there must be downward corrective phase moving against the major trend,followed by continuation of upward trend

Minor phase

Let’s start with minor phase and respondents’ perceived importance of technicalanalysis

Chart 3.2: frequency of using technical analysis in short-term

Respondents were asked how much weight of signals given by using technicaltrading rules are in their investment decision-making The answer was providedwith a scale ranging from 1 to 5, in which 1 represents the least and 5 serves themost weight in arriving at final investment decision From the chart above, 33.33%

of respondents surveyed think technical analysis is a major determinant of theirposition either entry or exit, long or short in the market The number of respondentschosing 3 and 4 level are almost on an equal footing with 26.67% and 23.33%respectively This result means approximately more than half of respondents weight