Technical Analaysis Overview
Most investors rely solely on Fundamental Analysis for their investment decisions (see REITinvestor.ca FA for our FA on the REITS we cover). Some even like to say of Technical Analysis; there are a lot of charts at the bottom of the ocean. An analogy that suggest; that using charts can lead straight to disaster.
At REITinvestor.ca we use Technical Analysis in concert with Fundamental Analysis: Depending on our FA view, we turn to TA to guide us on possible entry & exit points to maximize gains and minimize any losses. We won’t make a move in our REITinvestor.ca Fund without a full TA on a given REIT.
REITinvestor.ca TA – Our Road Map to Investing
Each TA study provides us with a road map to investing and gives us confidence, guidelines and measured expectations prior to taking a position. Using a variety of TA techniques we are able to predict with fairly high certainty how the market is going to act in the near future. In contrast, most investors are unsure and tend to wait for a move to be nearly complete before investing or exiting a position. This explains why a majority of investors are not profitable and can’t beat the market in good times or bad.
As a back drop to REIT investing, we apply our TA to the overall market, namely the TSX and DOW in order to have a view on the overall market. “A rising tide can lift all ships.”
How We Do Our TA
Each day we chart the overall market and publish our forward looking market view in REITinvestor.ca Market Message. Then we scan the charts of each of the REITs we cover looking for new technical information on which to base a road map for that REIT.
Effectively we are looking at where road has been before and what it has done lately in order to have an expectation about what lies ahead. More precisely we can describe the purpose of REITinvestor.ca TA in the following terms:
1) To establish past and current investor sentiment toward a REIT that will manifests itself in REIT unit price going forward. To do this
a. we look at various time adjusted chart periods for overall trend & the related price range,
b. We then more closely examine those charts for patterns, signals or indicators that suggest a future price move. This we call our TA thesis. It could be a continuation pattern or a reversal signal that appears in the examination on which we base our thesis on.
c. Once a TA thesis has been established we then establish confirmations requirements in various forms or alternatively, what new pattern formation would negate our TA thesis.
2) Once a thesis has been confirmed we then apply various measures from Fibonacci calculations to Elliot Wave Theory to develop short-term & long term price targets. Our measured TA Price Targets allow us to decide on a risk/return model where we ask ourselves; what is the profit outcome of being right versus the loss outcome of being wrong? This risk/return model is designed to keep us out of marginal positions as well as get us out of a bad position early rather than remain in a position without a thesis.
TA – The Art of Chart Reading
We do not wish to teach investors the art of Technical Analysis, and it is an art more than a science. We will simply explain what we see in the charts and what investment strategy we believe might work. As always, we are not making a recommendation to buy or sell anything. We are only offering our TA opinion on the investor sentiment that is being reflected in price move and volume on that REIT.
Each technical analyst can and will have their own opinion, we have ours. On REITinvestor.ca we post our TA opinion and targets for information purposes only. Our skill in predicting future moves are stellar in that our targets get hit about 2/3 of the time. That also means we are wrong about 1/3 of the time.
It is important to never forget that investor sentiment can change at anytime, whether due to an internal news event or an externality with far reaching consequences. An example of an internal event that may change sentiment could be the sudden departure of a key company officer. An example of an external event that may change investor sentiment could be the arrival of a new competitor. Investor sentiment is all TA is attempting to understand. Sentiment can change at anytime.
REITinvestor.ca TA Example
What better way to explain how we use TA than with an example.
Today, February 16. 2009, we are looking at Boardwalk REIT (symbol BEI.UN). We know we like BEI.UN from our current FA. They are in our opinion, the most solid TSX listed REIT out there. However the yield is quite low at 6.6%. This can be interpreted as a testament to investor confidence that BEI.UN will continue to perform, even grow.
However, from our FA perspective, the yield plus growth potential is not attractive enough to overcome our economic and market risk concerns. This is not to say we that we don’t like BEI.UN, we do, just not at the current price & yield.
But what does our TA team think BEI.UN?
REITinvestor.ca TA on BEI.UN
Before investing in any REIT including BEI.UN we want to develop a profile of recent investor sentiment. Looking at the six month chart we see that BEI.UN like all the REITs within the TSX has experienced a huge decline, in this case a 50% sell off from a high $40/unit in summer 2008 down to an intra-day low in mid November 2008 of $19.76 per unit. This gives us a time frame from which to work a daily candle chart on.
Within that frame, we can see new lower lows being formed without a new high occurring entirely through that sell off period. Finally in late December 2008, BEI.UN made 45% bounce off its LOY (low of year). The bounce & run took only a few days to complete, running all the way up to meet its declining 200MA (moving average) line at $26.95. A bounce of such magnitude suggests that the buyers had been waiting for BEI.UN to stop falling so they could buy. In other words, Boardwalk REIT was oversold near $20.
However, the quick fail off from the 200MA gave rise to possibility that BEI.UN could continue heading lower depending on where the next low would occur. Alternatively if BEI.UN could hold above $20 then the chart could begin to signal a possible bottom reversal.
A reversal pattern did form when in mid December BEI.UN bounced twice off $21.00 within a few short days. This we recognized as a new support level and established a great speculative entry signal for investors so inclined. A third test & hold of $21.00 would be an even better turn indicator.
More importantly to us, multiple reversal signals appeared on December 17 & 18 suggesting that BEI.UN would at least retest the last resistance of $27 and possibly enjoy a phase III Elliot Wave Power leg which would measure more than a $7 run. The resulting run was approximately $8 to $29.00, another 38% move in a few days.
As of today $28.75 - 29.00 has provided Resistance since being touched the 1st week of January 2009. Conversely we can set $24.00 & $25.00 as new short-term Support with $20 -$21 as major support.
What we think we might do with BEI.UN?
Remember we like Boardwalk from our FA. We would like to take a long position, not for its yield but for its solid FA and growth potential. (Currently, it is the only REIT in our universe that stands a reasonable chance for an increase of distribution in 2009.) This means that a distribution growth factor could move the price higher in the months ahead.
Boardwalk REIT reported 2008 Q4 on February 13, 2009 and moved up a mere 3.5% on decent results with cautious market rental comments.
We would like to buy BEI.UN as such we have developed two investment strategies based on the six month daily & 20 day 60 min charts. The strategies are;
1) Do nothing – we never have a problem this one. BEI.UN and the TSX have been in a strong down cycle since late 2008. We believe that the TSX & DOW has another leg down to go. (see Market Message – Long Term). On the last trading day BEI.UN closed at $27.19. We have a high degree of confidence that BEI.UN will fail in the $28.00 – 28.75 zone. There is no reason to be a part of this. The risk return is unattractive to us. If BEI.UN runs without us, we won’t have any regrets.
2) We would buy next test & hold of short term Support near $26.00 or near long term Support near $20.00. If $25.50 holds then multiple measures give a current target is $32 and we would sell near there for a 23% gain. Our stop would be any close below $25.50. This is a very low risk excellent return plan. If $25.50 were to fail we would definitely be interested to purchase BEI.UN near $20.00 with a new TA target that would need to be formulated. A close & hold below $20.00 would chase us out of BEI.UN until another TA thesis could be formed.
That’s our TA & investment plan for BEI.UN.
Where to Learn More About TA
To anyone who wishes to become proficient in Technical Analysis we strongly recommend you subscribe to www.stockcharts.com and spend as much time there as you can. They have an excellent chart school with trading strategies, posted public charts, chart glossary and other useful resources. We use stockcharts.com member tools to build and annotate our charts.
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