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Technical Analysis

How useful is Technical Analysis in Saudi Stock Market

Executive Summary

“Does Technical Analysis work on Saudi stocks and the market?” – This is one of the questions that worry a trader and an investor. Technical analysis, which is an art as well as science, is used by investors/ traders to generate better returns based on certain trends that can be both analyzed and predicted. It �rmly believes that market movements are not random and follow a speci�c pattern, which can be analyzed for di�erent periods from hourly to multi-year basis. “Dow Theory”, which forms the basis for technical analysis, suggests that history repeats itself over a period of time, and we can expect the technical analysis techniques to work in future as well. The tools, if properly used, would provide good results.

In this report, we have tried to �nd out the applicability of technical analysis for Saudi stocks and the TASI index. The report initially focuses on ‘What is Technical Analysis’ (in theory) and then provides applicability of the same through numerous examples. For this, we have studied the history of the TASI index and stocks thereof to assess if technical analysis is applicable to them. With a number of examples, we can say that Technical Analysis continues to work for Saudi stocks and index.

We have covered many Technical Analysis patterns, indicators, candlesticks, etc., applicable for stocks and TASI. Our analysis suggests that candlesticks, trend lines, and support resistance zones work perfectly well. The movements of stocks are sometimes quite fast and possess good momentum as well; therefore, technical observation of stock movements can help yield good returns. The historical trends observed in stocks are also good and hold themselves fairly long enough to make money from them. We have tried to summarize a few techniques in a single chart of TASI considering a long period, which displays how studies can be combined and applied for best results/returns.

Analyst

Jassim Al-Jubran +966 11 [email protected]

AGM - Head of Research

Abdullah Alawi+966 11 [email protected]

What is technical analysis?

Technical analysis is a study of supply and demand in a market to predict the direction and trend of the asset class under study. It gauges emotions, trends, and the demand–supply scenario by studying the market instead of its components.

The Dow theory is the basis of technical analysis and states the following:

1. Price movements are not random: Price follows a certain underlying trend. However, markets not always trending and at times are in a sideways-congestion zone.

2. Price discounts everything: The current price re�ects information available in the market, which represents traders, investors, analysis, and fund-houses, among others. Therefore, it would re�ect a lack of judgment to disagree with the price set by the market. Technical analysis utilizes this price and price action to predict price movements.

3. History repeats itself: Technical analysis follows the repetitive principle of price action. The market is in�uenced by human psychology as well. Although the chart patterns used in technical analysis are old, they are tried and tested over time and work well. These chart patterns re�ect market psychology and help us predict, with respectable probability, the price action and trend.



Technical Analysis


Technical analysis uses the following techniques/ tools to analyze the asset class under consideration. (All examples used below are from TASI or TASI stocks)

1. Support and Resistance: Support is a price zone where the demand for stock grows and buyers become eager to buy. As a result, it leads to a decline of the stock/market. At support, sellers become less aggressive and are unable to push prices down. The diagram below depicts support and resistance zones on TASI stocks.

Support zone on daily chart (2160 – Saudi Arabian Amiantit Co.)

Support Zone (1020 – Bank Aljazira)

Source: Bloomberg, AlJazira Capital Research




Technical Analysis


Support Zone (8250 – AXA Cooperative Insurance Co.)

Resistance zone (4003 – United Electronics Co.)

Resistance zone (1010 – Riyad Bank)






Technical Analysis


Upward sloping trend line (4003– United Electronics Co.)

Resistance zone (1020 – Bank Aljazira)

2. Trend: The asset class under consideration may follow a trend, which can be determined by drawing trend lines. Trend lines are drawn by connecting the swing highs or lows. The price is likely to �nd support/resistance at the trend line. When breached, the trend could end or reverse. The chart below depicts how a price can �nd support at an inclined trend line.





Technical Analysis


Downward sloping resistance line (4170 – Tourism Enterprise Co.)

Upward sloping trend line (8030 – The Mediterranean and Gulf Insurance and Reinsurance Co.)

Downward sloping resistance line (8060 – Saudi United Cooperative Insurance Co.)






Technical Analysis


Head and shoulders pattern (2010 – Saudi Basic Industries Corp.)

Symmetrical Triangle (4050 – Saudi Automotive Services Co.)

Symmetrical Triangle (4080 – Aseer Trading, Tourism and Manufacturing Co.)

3. Chart patterns: Assets form similar recognizable patterns, which gives similar market movements each time a chart pattern is formed correctly and once the price moves out from it. There are many recognizable chart patterns in the market.

We have covered the “Head and Shoulder” pattern, which resembles a head in the middle and shoulders on either sides. This pattern precedes a price decline. When prices break the neckline, a decline is experienced, as shown in the image below also symmetrical Triangles are important which give a �ne of a new upward or downward movement after a breakout.





Technical Analysis


20-day simple moving average (2001 – Methanol Chemicals Co.)

20-day simple moving average (1120 – Al Rajhi Bank)

4. Moving averages: It is the average of the price for a set number of days of a security or asset under consideration. It is like a smoothed trend line. Moving average gives us the direction of the trend; price �nds support and resistances at moving averages. The chart below shows how a 20-day simple moving average works as a support for a security.





Technical Analysis


20-day simple moving average (2220 – National Metal Manufacturing and Casting Co.)

50-day SMA - (4300- Dar Alarkan Real Estate Development Co.)

200-day SMA – (4300- Dar Alarkan Real Estate Development Co.)






Technical Analysis


5. Volume: Volume is an important indicator in technical analysis. So to say volume goes with the trend. When a stock starts moving up or breaks out of a consolidation pattern, volume increases. The same is applicable for a downtrend. Volume can be used as con�rmation to the trend or break out in technical pattern. Thus, volume goes with the trend. The chart below depicts how volume of the stock increases when it breaks out of a triangular pattern. Furthermore, the stock advances and so does volume, indicating an uptrend in the stock.

Volume and stock price (4030 – National Shipping Company of Saudi Arabia)

Volume supporting a breakdown (2240 – Zamil Industrial Investment Co.)

Volume supporting a breakdown (2310 – Saudi International Petrochemical Co.)





Technical Analysis


6. Bollinger bands: Theses are volatility bands generally placed 2 Standard Deviations away from price. When the volatility is less they contract and when the volatility increases they expand. When price breaks out of either of the bands it generally continues in that particular direction and trending move could develop.

Bollinger breakout – stock starts trending post breakout (4290 Alkhaleej Training and Education Co.)

Bollinger breakdown – Stock develops a downtrend after the breakdown (7020 Etihad Etisalat Co.)




Technical Analysis


7. RSI (Relative Strength Index): It is a momentum indicator which measures the change of price movements. It oscillates between 0 and 100. Usually 30 is regarded as the oversold region and 70 as the overbought region. RSI is also used to identify trend; some analysts read values above 50 as positive and below 50 as negative. RSI can also be used to identify Divergences between price and the indicator itself (RSI). A positive divergence develops when the price makes a new low but the RSI does not. On the other hand a negative divergence is developed when the piece makes a new high but the RSI does not. Divergences indicate an impending trend reversal.

RSI Bullish – Price and RSI and RSI develop a trend, trend is strong till Q3 of 2013 until divergences occur. Divergence indicates the trend is weakening a counter trend may develop (4003 United Electronics Co.)

RSI Bearish - Price and RSI move down together (2380- Rabigh Re�ning and Petrochemical Co.)





Technical Analysis


RSI - Positive divergence is observed in September-2015 and it precedes a price rise, after which the down trend is broken (4140 - Saudi Industrial Export Co.)

RSI – Negative divergence is developed in Q2 and Q3 of 2014 (4080- Aseer Trading, Tourism and Manufacturing Co)

Candlestick- Bullish engul�ng candlestick formation is a bottom reversal formation, it signals higher prices in the near future as buying pressure increases (4300- Dar Alarkan Real Estate Development Co.)

8. Candlesticks: It is a chart in which a day’s (or for that matter any desired time frame) trading action in represented by a candle. Open, high, low and close are the data points required to form a complete candle. The �lled portion is called the body of the candle and the upper and lower wicks are called as the shadows, which represent the high/low ranges. If the closing price is less than the opening price then the candle is drawn from the top of the body representing the opening price and bottom representing the closing price. Color coding is used to di�erentiate between candles which opened lower and ended higher and for candled which opened higher and closed lower.




Technical Analysis


Candlestick – Bearish engul�ng candlestick formation is a top reversal formation, it signals lower prices in the near future as selling intensi�es (8200 - Saudi Re for Cooperative Reinsurance Co.)

Hammer candlestick formation is bottom reversal formation, which occurs after a down trend. This signifying lower level rejection, buyers get aggressive which pushes the price up. And hence a lower shadow is created. This indicates that the down trend might have ended (4140- Saudi Industrial Export Co.)

Dark Cloud cover – It is formed when after a typically bullish day, the stock opens higher next day. However the bull lose control and suddenly selling starts and the candle closes into the previous candle (engulfs at least 50% of the previous candle). This indicates the uptrend to have halted for the time being (4140- Saudi Industrial Export Co.).






Technical Analysis


Grave stone Doji – As the name suggests it is a bearish formation and indicates top being formed. It has a long shadow on the upside, indicating aggressive selling there (4270- Saudi Printing and Packaging Co.)

MACD (Moving Average Convergence Divergence): It is a momentum indicator which is a calculated by subtracting the shorter term moving average from the longer term moving average, this is the MACD. A 9-day EMA of the MACD is plotted on it which is called the signal line. It is the crossover of the MACD and the signal line which act as the trigger for Buy and Sell signals.

Negative cross over acts in Q2 of 2014 was a signal that the stock is starting a bear phase. Stock declined sharply there after - (4280 - Kingdom Holding Co.)

Negative crossover in Q1 of 2008 came right near the top, which indicated that the stock could decline in the months to come – 8010 (The Company for Cooperative Insurance)



Technical Analysis


Fibonacci Percentages – The stock takes support at the 38.2% retracement of the rise experienced since Januray-2014. It rallies after �nding support at this level. (4250 - Jabal Omar Development Co.)

9. Fibonacci levels/Percentages: These are the levels which are used to �nd out reversal points. These are derived from the Fibonacci sequence; commonly used percentages are 38.2%, 50.00% and 61.8%.

TASI performance across di�erent time frames

1. The chart below shows two inclined trend lines for 2003, 2004, and 2005. These trend lines act as support zones for the index; also the index bounces o� the trend line sharply. It is only at the end of 2005 that the index breaches the inclined trend line and breaks the uptrend to correct sharply.

2. The index forms a triangle during 2007 and 2008 which it breaks on the downside and achieves the downside target of the triangle.

3. The horizontal line at 6,869 provides support in 2006 and 2007 before it is broken in 2007. This same line acts as a resistance in 2010, 2011, and 2012.

4. Volume grows as TASI advances in late-2011 and early-2012. Notice the same performance in late-2013 and early-2014. As we say, volume goes with the trend.

Saudi stocks follow technical analysis

Analyzing the TASI index and stocks across sectors, market cap at di�erent time intervals reveals that the Saudi stock market follows technical analysis. Analyzing these trends over a period of time can help investors earn better returns.





Technical Analysis


Glossary:

Bear market: This refers to a long period during which the market is in a downtrend.

Bollinger Bands: Bands used to calculate the volatility of the asset class at any given time.

Breakout: An increase in a stock’s price that results in the price breaking the previous high or a resistance level is known as a breakout. This is generally accompanied with an increase in volume.

Breakdown: The opposite of a breakout, a breakdown refers to a security breaching its previous low or price support, or breaking down from a price pattern. This is generally accompanied with an increase in volume.

Bull market: This refers to a long period during which the market is in an uptrend.

Consolidation: A period during which a security trades sideways.

Gap: When a stock opens outside the previous day’s trading range, a gap is created, which has technical signi�cance.

MACD: Moving Average Convergence and Divergence, is a trend following momentum indicator.

Market analysis: This refers to the particular method used to study the market, e.g., fundamental and technical analysis.

Momentum indicators: These are secondary analysis tools that are derived from primary data, such as price. They are used to determine the market trend as well as overbought and oversold conditions, among others.

Moving average: The average price (or volume) of a stock over a certain period is known as the moving average. This is generally plotted on the graph to smoothen out the trends. Therefore, this is basically a smoothened trend line.

Oversold: The price of a security when rapidly moves down, the momentum indicator (like RSI) dips sharply. Thus when the momentum indicator is over sold a bounce in the security is expected.

Overbought: The opposite of oversold, overbought condition occurs when price rapidly moves up. The momentum indicator (like RSI) as a result rises sharply. Such overbought levels for a momentum indicator like RSI indicate a correction is expected for the stock.

Resistance: The price at which selling would increase and intensify enough to halt the price rise, at least in the near term, is called resistance.

RSI (Relative Strength Index): Momentum indicator which is oscillates between 0 and 100. Generally used as an oversold and overbought indicator.

Support: This refers to the price at which buying would increase and intensify enough to stem the price decline, at least in the near term. It is the opposite of resistance.

Trend: The general direction of the market/security over a given time period is known as the trend.

Trend line: The line that connects two consecutive troughs or peaks and de�nes a trend is called a trend line.

Volume: This refers to the number of shares (or contracts of assets under consideration) traded over a certain period. Generally, the time period is a single trading session.

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Disclaimer

AlJazira Capital, the investment arm of Bank AlJazira, is a Shariaa Compliant Saudi Closed Joint Stock company and operating under the regulatory supervision of the Capital Market Authority. AlJazira Capital is licensed to conduct securities business in all securities business as authorized by CMA, including dealing, managing, arranging, advisory, and custody. AlJazira Capital is the continuation of a long success story in the Saudi Tadawul market, having occupied the market leadership position for several years. With an objective to maintain its market leadership position, AlJazira Capital is expanding its brokerage capabilities to o�er further value-added services, brokerage across MENA and International markets, as well as o�ering a full suite of securities business.

1. Overweight: This rating implies that the stock is currently trading at a discount to its 12 months price target. Stocks rated “Overweight” will typically provide an upside potential of over 10% from the current price levels over next twelve months.

2. Underweight: This rating implies that the stock is currently trading at a premium to its 12 months price target. Stocks rated “Underweight” would typically decline by over 10% from the current price levels over next twelve months.

3. Neutral: The rating implies that the stock is trading in the proximate range of its 12 months price target. Stocks rated “Neutral” is expected to stagnate within +/- 10% range from the current price levels over next twelve months.

4. Suspension of rating or rating on hold (SR/RH): This basically implies suspension of a rating pending further analysis of a material change in the fundamentals of the company.

The purpose of producing this report is to present a general view on the company/economic sector/economic subject under research, and not to recommend a buy/sell/hold for any security or any other assets. Based on that, this report does not take into consideration the specific financial position of every investor and/or his/her risk appetite in relation to investing in the security or any other assets, and hence, may not be suitable for all clients depending on their financial position and their ability and willingness to undertake risks. It is advised that every potential investor seek professional advice from several sources concerning investment decision and should study the impact of such decisions on his/her financial/legal/tax position and other concerns before getting into such investments or liquidate them partially or fully. The market of stocks, bonds, macroeconomic or microeconomic variables are of a volatile nature and could witness sudden changes without any prior warning, therefore, the investor in securities or other assets might face some unexpected risks and fluctuations. All the information, views and expectations and fair values or target prices contained in this report have been compiled or arrived at by Aljazira Capital from sources believed to be reliable, but Aljazira Capital has not independently verified the contents obtained from these sources and such information may be condensed or incomplete. Accordingly, no representation or warranty, express or implied, is made as to, and no reliance should be placed on the fairness, accuracy, completeness or correctness of the information and opinions contained in this report. Aljazira Capital shall not be liable for any loss as that may arise from the use of this report or its contents or otherwise arising in connection therewith. The past performance of any investment is not an indicator of future performance. Any financial projections, fair value estimates or price targets and statements regarding future prospects contained in this document may not be realized. The value of the security or any other assets or the return from them might increase or decrease. Any change in currency rates may have a positive or negative impact on the value/return on the stock or securities mentioned in the report. The investor might get an amount less than the amount invested in some cases. Some stocks or securities maybe, by nature, of low volume/trades or may become like that unexpectedly in special circumstances and this might increase the risk on the investor. Some fees might be levied on some investments in securities. This report has been written by professional employees in Aljazira Capital, and they undertake that neither them, nor their wives or children hold positions directly in any listed shares or securities contained in this report during the time of publication of this report, however, The authors and/or their wives/children of this document may own securities in funds open to the public that invest in the securities mentioned in this document as part of a diversified portfolio over which they have no discretion. This report has been produced independently and separately by the Research Division at Aljazira Capital and no party (in-house or outside) who might have interest whether direct or indirect have seen the contents of this report before its publishing, except for those whom corporate positions allow them to do so, and/or third-party persons/institutions who signed a non-disclosure agreement with Aljazira Capital. Funds managed by Aljazira Capital and its subsidiaries for third parties may own the securities that are the subject of this document. Aljazira Capital or its subsidiaries may own securities in one or more of the aforementioned companies, and/or indirectly through funds managed by third parties. The Investment Banking division of Aljazira Capital maybe in the process of soliciting or executing fee earning mandates for companies that is either the subject of this document or is mentioned in this document. One or more of Aljazira Capital board members or executive managers could be also a board member or member of the executive management at the company or companies mentioned in this report, or their associated companies. No part of this report may be reproduced whether inside or outside the Kingdom of Saudi Arabia without the written permission of Aljazira Capital. Persons who receive this report should make themselves aware, of and adhere to, any such restrictions. By accepting this report, the recipient agrees to be bound by the foregoing limitations.

AGM - Head of ResearchAbdullah Alawi+966 11 [email protected]

Senior Analyst

Talha Nazar +966 11 [email protected]

AnalystSultan Al Kadi+966 11 [email protected]

Analyst

Jassim Al-Jubran +966 11 [email protected]

General manager - brokerage services and sales

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AGM-Head of international and institutional

brokerage

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Brokerage

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AGM-Head of Sales And Investment Centers

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how useful is technical analysis in saudi stock … · technical analysis how useful is technical...

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