Basic stock technical analysis and charting techniques

Many traders rely solely on Technical analysis to give them the indicators they need to press the BUY or SELL button. As I outline in my Investment Approach, I do not place a huge reliance on technical analysis signals when making an investment decision, the simple reason being, technical analysis works until it doesn’t. In the long term the stock price always reverts back to the risked discounted cashflow generated by the company. In my view to make money from the stock market consistently a deep appreciation of the fundamentals is therefore required.

That said the technical picture is the aggregate of the other market participants views so it shouldn’t be ignored either. Technical analysis can therefore be a useful complement to deep fundamental analysis and on that basis it can though help you to take better positions and therefore squeeze out additional margins on your investments. Moreover, used correctly the charts can also help you identify resistance points in stocks and momentum/trends in either direction which can provide a very useful sanity check on the logic behind the fundamental analysis that you (should) have already done and the resulting valuation you place on the stock.

I am not an expert in Technical Analysis, nor do I desire to be, but I will introduce you to the techniques I use:

First step, get access to charting tools.

You don’t need an expensive charting package, there are many descent free services available which cover UK stocks. The basic techniques (and some more advanced) are all available with IG Index Stock Broker Accounts. This service also allows you access to Level 2 data and Direct Market Access on a range of markets, including the UK. I will come to these two topics in a future blog post but there are lots of information available on both only a google away. If you are happy with your existing broker you can also grab a free account with Vox Markets which also has basic charting tools available amongst many other features, which I covered here.

So anyway by now you should be staring at a blank chart, so now on to some techniques you can apply…

THREE CORE CHARTING TECHNIQUES 

I will use British Land (BLND) as a company to work us through the following techniques. I chose this company as it has had some interesting moves, it is also a stock I don’t know well, so it should avoid any bias creeping into my analysis.

1. Plotting the General Trends

The trend is very important to establish and if you do just one piece of technical analysis then this is the one you should do before making your final investment decision. It is an uncomplicated approach and it involves simply plotting a line on the highest highs and the lowest lows in the period.

This analysis will reveal one of three outcomes. An uptrend, which is a series of higher highs and higher lows with a downtrend showing the opposite picture. A sideways movement will show no clear trend. The time period you perform this analysis is also important, with in technical analysis a long term trend is seen as one over 1 year and an intermediate trend over one – three months with short term trends being less than one month.

My suggestion is you plot the trend over at least 1 year, but also look back further. The results of the this analysis is important as it shows the general direction of travel. Once this is established then it is important to ask some questions. If you are considering buying against a long term downtrend, why? What do you know that is against the general trend of the market?

Taking our stock British Land (BLND) and looking back 14 months from today, i.e. to January 2016, I have plotted a long term trend line and intermediate trend line as follows:

BLND Trends.png

The results show a long term downtrend and an intermediate trend down. There is a short term trend up in April which we will come back to this when looking at Resistance and Support levels as this deserves attention albeit it is not an established change in trend at this stage.

It is pretty clear here that the long and medium term picture is a downtrend. The stock has been unpopular and clearly a BUY here would be contrarian. I won’t attempt to do any fundamental analysis, but it is worth noting that the company is a part of the ‘BREXIT Basket’. As British Land is an owner of commercial property its’ fate is seen linked to the strength of London’s business sector. On this note you will see I have not tracked the lowest lows that were achieved in the immediate aftermath of BREXIT, which would result in a much deeper trend downwards. Perhaps charting purists handle these events differently but given this was a short term movement triggered by a ‘black swan’ event it I feel it distorts the picture.

2. Resistance/Support levels

The resistance and support levels are areas where supply/demand kicks in and the share price struggles to get past a certain price, i.e. a restitance level or fails to fall below another price, i.e. a support level. This analysis can identify a trading range which can be profitable to trade within and it could also indicate that BUY orders should be parked when the price is approaching the resistance level. It also should prompt the question as to why the market buys and sells heavily at certain points and whether you concur with these BUY and SELL targets based on your fundamental research.

This method involves drawing horizontal lines on the chart where the same highs and lows have been achieved repeatedly and/or where a clear sideways pattern can be observed.

Below is the chart for British Land (BLND) from October 2016 to April 2017, which is a smaller snapshot of the longer term chart above.

BLND Resitance Support

The chart shows us that the share had been trading between October 2016 and Mid April 2017 between 575p and 640p, i.e. a 11% trading range. Interesting features from above are A, B and D when the price approaches the support and rebounds from this level. Point C shows the first attempt to breach the resistance in late December 2016 and point E shows this resistance level was finally breached in late April, 4 months later.

We are looking at a fairly short period of time, but it is important in the context of British Land as this period follows the period immedatedly after the BREXIT vote and thus can be seen as the ‘new normal’. Questions to ask yourself from this analysis are why does the market sell off in 640p region and buy in the 580p region? Where are your BUY and SELL Targets? The resistance has though just been broken and the stock is currently trading at 650p, why? What facts have changed? If momentum is established, the theory goes that the stock is more likely to continue in the same direction, particularly after breaching resistance, so should you SELL at this point?

3. Simple Moving Averages

A moving average is a trend line of sorts. The moving average is the sum of all closing prices over the period, divided by the number of days in the period. So the 20 day moving average on the 28th January would take the sum the closing prices over the last 20 trading days and divide by 20. For example, If we assume the price was 550p for the first 10 days and 600p for the next 10 days then the 20MA would be 575p on the 28th January.

Moving Averages can be used to identify the breakouts or reversals and two particular terms or features can be noted to assist here. A price crossover is where the current share price breaks out from the moving average. The longer the number of days in the moving average the larger the assessment is against the current share price. A Moving Average crossover is another signal, this is where one Moving Average crosses another, for example a 50 day moving average crossing over a 200 day moving average.

Let take a look at British Land again…

BLND Moving Averages

You will note some features from the discussion above, i.e. point B is a price crossover, i.e. the 200 day and 50 day Moving Average is crossed in Mid April 2017, which is also highlighted above in method 2, a break of resistance. There is also a Moving Average Crossover in late April 2017. This analysis very much supports the short term bullish move as highlighted above and the same questions should be pondered, i.e. is the long term trend about to turn? What facts have changed to support this move?

It is also worth noting point A, the BREXIT vote. The stock drops upto 30% below the 200 day MA. On the face of it this could look like a BUY opportunity but clearly this was as a result of the BREXIT vote so it is very important to assess the facts that have changed before diving in.

SUMMARY – What can we conclude on British Land from the Charts?

The long term picture is a down trend, the short term picture is a period of momentum. As mentioned above, the important part of technical analysis is to look for fundamental rational for the technical picture moving. This is why the technical picture should never be dismissed though, the aggregate of the other market participants have formed a view and it should be understood why. So in the case of British Land, If I were looking to take a position then the questions I would be seeking an answer to are:

  1. There is a long term down trend. Why? Is this suitable as a long term investment?
  2. There has been recent resistance and support levels established, what do these levels imply for the valuation?
  3. There is a short term period of momentum with key technical bullish signs, including break of resistance, price crossover and moving average crossover. What has prompted this increase in sentiment? Is there any potential to reverse the long term downtrend? If I am an existing holder should I ride the momentum to squeeze out some further gains or consider selling at this level?

I hope this is a useful overview of the merits of combining technical and fundamental analysis. I will do a fundamental analysis of British land in the coming weeks where I will incorporate the technical analysis and attempt to answer the questions it raises.

Happy Charting!

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How to avoid compulsive portfolio monitoring. Making use of Price Alerts, RNS Alerts, Limit Orders and Stop Losses

I am starting to get quite a few emails from new investors who want my opinion on various topics, so I thought I would cover a few ‘beginner pieces’ over the coming weeks, hopefully putting together a few blog posts which stock noobs can find accessible.

One of the things I have started to finally perfect in my 10th year in the stock market is just checking into my portfolio 1-2 times a day. This is still too much in my opinion but this is way down from the 15-20 times a day I used to check during the early years. Why is this so important? A key part of being a successful Investor or trader is having discipline, the more times you check in on your portfolio the higher the chance there is of trading on impulse rather than trading on clear rationale. I share four handy ways that can reduce the time you spend in front of your share portfolio and hopefully lead you to make better trades as well as saving time…

1.Price Alerts

There are numerous price alert services which will email/text/push you when a certain Buy or Sell price is reached. If you have done both your fundamental and technical research then you should have very clear price targets in mind. This is where the risk/reward favours a buy or where the stock becomes overvalued and you may want to consider selling, or at least derisking.

By far the best price alert service I have seen is through the IG Index Stockbroking account, a screenshot of which is below:

IG Alerts

The service allows unlimited price alerts on any stock (you don’t need to own the stock already), which can be set for BUY and/or SELL prices. Each time a target is met IG will alert you within the trading platform, but perhaps more useful an email notification and/or a push to your Phone or iPad.

I prefer price alerts as I tend to trade manually as sometimes some further rational thought is required before placing the trade, but you can also automate this step too…

2. Stop Losses

I will assume that you are an inexperienced investor and therefore using a typical execution only Retail broker, i.e. one who places orders through a specialist Retail Service Provider (RSP) Market Maker. Most retail brokers allow you to place Stop losses which can help you to manage your risk and deal automatically on your behalf. I won’t get into how to use stop losses as part of a risk management strategy in this piece, I will aim to cover this in another post. A stop-loss though is where a number of shares defined by you is instructed to be sold at a price defined by you. The price you set though will not necessarily be the price the stop-loss is executed – more on that later. Here is what a typical stop loss order screen will look like, using Hargreaves Lansdown as an example:

Screen Shot 2017-04-13 at 11.49.15

As touched upon above, a stop-loss is not a guaranteed to achieve the sell price you have determined or even be executed at all. This can happen for a number of reasons, but here are the three most common:

  1. During periods of volatility the market may move quicker than the market maker can accept your order. This could also be where the price quoted by the market makers is not the real price and trades are being negotiated manually.
  2. Even under less volatile periods a stop loss can fail to execute at your desired price if there are limited buy orders available at the level you wish to sell. This is realistically only likely in the smaller stocks, normally where you are dealing in larger sizes but sometimes even smaller sizes (c£1000) can be an issue in very illiquid stocks. Pay attention to the Exchange Market Size which can be found on the London Stock Exchange site, example here. The EMS is the number of shares a market maker under normal conditions is obliged to deal in. If your stop orders are for a number of shares higher than this, then there is a chance the stop loss may fail or not achieve your stop price.
  3. When news is released, the market may ‘gap up’ or ‘gap down’ as orders are placed in the market on SETS. On stocks where market makers are present, i.e typically smaller stocks which use the SEAQ platform, these market makers may set their buy price at a level significantly below your stop loss.

The end result, the stop loss may be triggered at a level materially below your stop loss. You should think of a stop loss as an instruction to stop, not a guaranteed stop. This is why I rarely use stop losses or Limit orders as I like to take some time to understand the price action before executing. I therefore tend to use price alerts, but stop losses can be useful to limit risk where you are unable to get online for extended periods.

Some brokers, such as Barclays StockBrockers also offer trailing stop losses, which are very useful if you want to lock in profits, as the price moves up the stop loss position also moves up. For example:

You buy a stock at 100p with a trailing 10% stop loss, i.e at 90p. The price increases to 150p and your stop therefore increases to 135p. The share price then falls to to 134p and the the stop is triggered at 135p.

Note – all of the same issues  as above are still valid with trailing stop losses, but one way to avoid some of them is to place orders directly at the exchange, using Direct Market Access (DMA) and skipping out the middle man, i.e. the market maker. I will cover this in detail in a further piece but this allows orders to be filled with more precision, but is too advanced for this post.

3. Limit Orders

Limit orders work in a very similar fashion to stop losses and there are two types of Limit orders, BUY and SELL orders. A BUY limit is where a Buy order is triggered when a price falls to a level as determined by you. A SELL limit is an order to sell a stock once the sell price reaches a certain limit.

Most retail brokers will not execute if the limit order price moves against you between the instruction triggering and a quote being received from the RSP:

Say a BUY order is placed to purchase a stock at 200p. The share price falls from 210p to 200p and the order is placed, however there is a wave of other BUY orders from other market participants at this level, which means very little stock is available to BUY at 200p and the Buy price moves to 201p before your order can be executed. The BUY order is not executed and returns to pending.

This buy order will not be dealt and with most brokers will return to pending. Do check with your individual broker though how they deal with Limit orders.

4. RNS Alerts and other Market News

Regulatory News Service (RNS) is the platform where all UK companies must release price sensitive news. Clearly macro news and other newspaper rumours can also impact the share price also, the most convenient and free way to receive this information instantly is via Vox Markets. You will receive notification pushed to your phone or desktop as soon as a company you follow releases information or is covered in any of the major newspapers. This free service should help you avoid continual checking of news feeds and just sit back and wait for a notification. There are also similar services, such a Investigate which will email you on the release of a company RNS.

SUMMARY

Placing some reliance on the above tools should reduce the time spent staring at your portfolio. My suggestion is to use the time instead to do so research on your portfolio or on some of those companies on your watchlist. Or even dare I say it go out and get some fresh air!

Screening Pre Revenue Companies

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


Valuing some pre-revenue companies can be extremely difficult, particularly those in Tech and other new industries. The core issue is that a lot of smaller pre-revenue companies are not in a place where they can give reliable earnings guidance or NPVs (Present value of future cashflows generated from the company). It is therefore necessary to use a screening tool to quickly filter the potential cash cows from the dogs. I have included below something I developed some years ago to identify potential companies to invest in. The tool asks a number of questions and points are awarded based on your response. Please note this tool is not appropriate for resource companies, these companies are generally more straight forward to value, I have written a separate post on reserve based valuations here.

Capture1.PNG

Pick a pre revenue company and if you do receive 8, 9 or >10 pts then that is a great start, it shows potential but this does not make the company an automatic buy, good companies can still be overvalued, so close down your dealing screen for now. The first thing you should do is remember that the valuation of a company in the long term is based solely on how much money the investment generates for shareholders through dividends or share buybacks. You should then look to do some quantitative analysis to consider that point further.

The best way of really estimating the value of a company, i.e. the potential Free Cash Flows (FCF) the company can make and potentially return to shareholders is comparing the NPV to the Enterprise Value of a company. I have a detailed NPV calculation that I have built in a recent analysis of Hurricane here that you can take a look at by way of example. It is actually not overly complicated to prepare a NPV computation, I’ll look to do a worked example in the future but for now this guide is fairly useful, a gentle introduction to the concept. Once you understand the concept you just need to have fairly sensible assumptions for revenue, costs, CAPEX, financing etc. Some assumptions you can glean from company presentations, other assumptions you may need to look to competitors and for some you may need to come up with your best educated guess!

capture2

The key is that you are looking for NPVs well in excess of the current Enterprise Value of the company,  this will allow plenty of scope for further derisking.

If you don’t feel comfortable with NPVs, you can do some more basic analysis, look at the competitors, what Price to Earning ratio are they on? So if your company has a market cap of £100m and competitors are on PEs of 20, is it realistic that your company can turn £5m of profit on a forward looking basis. If not then is the valuation of your company too high? If yes, can it keep growing its earnings going forward? It would take your company 20 years to generate enough earnings to justify its share price and how many years would that be in dividends for shareholders? I could go on and on but these are the sort of questions you need to ask yourself and remember the valuation of a company in the long term is based solely on how much money the investment generates for shareholders through dividends or share buybacks.

Summary

The screening test should enable you to filter companies fairly quickly, but make sure you do some number crunching and be as prudent as possible with your assumptions. Once you have developed an NPV for a stock on your watchlist there is always an opportunity to revise your assumptions. At some point you will find an entry level on a stock where you have a solid piece of research on.

No method is never infallible and you of course can amend some of the screening questions as you see fit, just make sure you are very honest and as prudent as possible with your costing and revenue assumptions.

Finally, If all of the talk of NPVS, CFOs and PE ratios scares you then not to worry, keep following my articles and generally I will use analytical methods where I can and I am always happy to answer questions…. And as always I welcome your feedback!

Screening Oil Companies Resources vs. their Enterprise Value

Disclaimer: Shareinvestors is not authorised by the Financial Conduct Authority to give investment advice. Terms such as ‘Buy’, ‘Sell’ and ‘Hold’ are not recommendations to buy, sell or hold securities, these statements and other statements made by the author have the meaning only to express the author’s personal views on the quality of a security. Independent financial advice from an authorised investment professional should always be sought before making investments. CAPITAL AT RISK. Full Disclaimer here.


The average private investor can find it most confusing trying to assess a company’s share price when looking at its resource base. This isn’t helped by wild claims by some junior resource stocks (which I won’t name) on billion barrel discoveries. So I’ll briefly explain each of the internationally approved reserve classifications to assist understanding.

We can also look at some of the more popular oil company’s enterprise values versus their resource base to illustrate how you can start playing with figures and building this into your appraisal of stocks.

The below summarises the Petroleum Resources Management System, and the different classifications of reserves:

reserve classes

Reserves

Hydrocarbons that are either already on production, approved for development or justified for development, i.e. commercial reserves. The most common way of assessing a company’s resources is using 2P reserves, i.e. reserves that are already on production and those reserves where a board FID case has been passed. As the reserves should be commercial in order to be recognised then this gives the investor some confidence of a viable production business. Note – commercial is a broad term though, Afren went into administration with 200mm Boe of 2P reserves!

Contingent Resources

These are resources that are discoveries, but development potential is on hold. This could because of sub commerciality or it could be the project is viable but further work is needed to get this to a FID. i.e. there are contingencies which need to be solved before they can be booked as reserves.

Prospective Resources

Exploration Plays, Prospects or Leads. Typically undrilled or not sufficiently appraised to move to contingent resources.

How are companies able to book reserves?

To stop companies quoting utter codswallop in their reserves, a Competent Person Report is required (CPR) before a company can recognise these reserves in its financial reports.

So let’s take a look at the bulletin boards favourite companies…

I’ve looked at Gulf Keystone, Genel Energy, UK Oil and Gas, 88 Energy and Sound Energy. I’m not going to analyse these companies in detail but just make brief comments about what the results show us.

2p reserve vs ev

Genel
Very low value assigned to each barrel. The overall OPEX Boe is low, however all contracts relate to Production Share Agreements which are less lucrative. That said this is potentially an attractive valuation and could be a buy signal.

Gulf Keystone
Very low value assigned to each barrel. The overall OPEX Boe is higher than Genel as its transport is through trucking rather than pipeline. Significant CAPEX also likely required to maintain production and access these reserves.

BP
Included as Benchmark, it is hard to value BP on this basis as it only publishes a 1P figure, it also as downstream and trading operations so the figure is likely lower than illustrated above when these factors are adjusted for.

UKOG
The favourite stock of the Bulletin Board. Based on its 2P reserves UK Oil and Gas appears hugely overvalued, with its 2P reserves valued at $60 a barrel this is well in excess of current oil price and thus the current valuation must be expecting material upgrades to reserves from its exploration plays. Let’s look at that next…

resources vs ev

The above chart combines reserves, contingent resources and prospective resources so low valuations here could indicate a buy signal and represent significant growth upside.

Genel and GKP
Both have lots of potential resource which could make them good longer term growth plays. Both operate in low CAPEX/OPEX environments, any oil price rise and the KRG payment situation sorted could help significantly. However, high risk too given where they operate. However, here is where you need to be cautious, I would though not buy GKP due to the distressed financial situation it finds itself in (I wrote about this here), this highlights the importance of using analysis like this as part of your research, not basing investment decisions solely on this analysis.

88E
A one trick pony company but with some promise. A recent CPR estimates 768m barrels net. It is also looking at conventional prospects expecting results of seismic soon, this could upgrade its resource bookings further. Again a good speculative play, close to infrastructure and planning permission unlikely to be an issue unlike UK Oil and Gas.

UKOG
Despite lots of media attention with its ‘Gatwick Gusher’ UKOG is unattractive to me. The Gatwick Gusher aka Horse Hill lead is not included in the reserves or resources classifications as it is too immature, and this is confirmed by its own RNS.

hh rns

UKOG does talk about 3.6bn barrels of OIP, however this is total oil in place and with today’s technology only a fraction will be recoverable. Taking a conservative recovery factor of 20% this gives 730m barrels, which granted if were to be included as prospective resources then it’s $ per Boe would be below that of Genel Energy, which I believe is a value stock. It is not clear to me when UK Oil and Gas will be able to firm up this lead to prospective resources and have a CPR on the figures though so I am very cautious.

Ultimately, for me I would not be considering an investment here until I see a clear timeline towards a booking resources or reserves on Horse Hill. To me one major bottleneck will be building the onshore facilities needed to extract the oil, this discovery with where it is located I cannot see extensive facilities gaining planning permission, at least without a lengthy process. Just look at how close we are at getting a third runway in the south east, extracting 700m barrels of oil in Sussex will be equally as protracted in my opinion.

Sound Energy
I have not included this company on the chart above as it is so far off the chart, its current resources are priced in at $586 per Boe! However, none of its recent discovery in Morocco is included in prospective resources or contingent resources, again I would be looking to understand when work can be done to move this discovery into these categories before jumping in here. Watch closely but not a BUY in my opinion.

Summary

You should never only look at Enterprise Value vs Reserves & Resources when making investing decisions but this screening method can identify over and undervalued companies, as long as you are prepared to understand what additional factors which may be behind valuations.

Disclaimer – I have a position equal to 2% of my net assets in Genel Energy. I have no further positions in any of the other stocks mentioned and to my knowledge nor do any close family, friends nor associates.

This post is purely my opinion and should not be taken as financial advice. I welcome any alternative comments and will consider adjusting posts based on information made available to me.