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FINANCIAL MARKET ANALYSIS 2013/2014

BY UCHE CEASER

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Content Page

Introduction

Equity Index

Foreign Exchange Currency

Commodity

Conclusion

References

Technical Analysis, Forecasting and Evaluation

Technical Analysis, Forecasting and Evaluation

Technical Analysis, Forecasting and Evaluation

Including essay with reflection on learning experience over the last 10 weeks

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Introduction

As an Investment Analyst, I have been asked by my portfolio manager to use technical analysis to consider the investment potential of various asset classes; Equity index (WEI), Foreign exchange currency (FXIP) and Commodity (CRB). My personal asset classes are FSTE100 (WEI), Euro/Dollar (FXIP) and Gold (CRB).

Throughout Bloomberg I will be using short, medium and long run analysis to forecast the price behaviour of each asset class via different types of technical analysis forecasting techniques such as trend lines, support and resistance levels, price patterns and confirming indicators.

Within this portfolio I have decided to use several different types of confirming indicators such as; Fibonacci retracement lines, Fibonacci sequences, Bollinger Bands, Moving average Conv/Divergence (MACD), Relative Strength Index (RSI), Moving Averages, Moving Average Oscillator displays (MAOD) and Candle Patterns. Furthermore throughout this portfolio I have consistently used Line charts for long term analysis, Candle sticks for medium term analysis and Bar for short term analysis.

The aim of this portfolio is to demonstrate which markets are best for investment during this current period given my technical analysis and forecasting.

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Equity Index

This graph analyses the FSTE100 UKX market in the long term with a 10 year difference between February 2004 and February 2014. We can see in this graph that there is a steady positive trend between 2004 – 2008 and 2011 - 2014. I believe quite strongly that the first positive trend was due to the strength of the UK economy at this time. Businesses were growing at steady rates and economic trade between the UK and Europe was good, this is highlighted by the green trend channel, with an approximate net change of 18.99% throughout this period.

However, as this graph demonstrates that entering the 2008 period prices start to fall dramatically, bouncing from the resistance line from 2004-2007 shown by the yellow line and breaking the support line from 2004-2007 into two types of price patterns which I have highlighted using the white circle; a triple bottom and Inverse Head and Shoulders. The head and shoulders can be considered as a buy signal when the price breaks above the neckline. In the case of an inverted head and shoulders formation, volume generally plays a larger role than in a regular head and shoulders, requiring an increase in volume for a breakout from the neckline. During this period the recession throughout the UK was starting to show its effects. Economists believe that when prices are expected to fall due to an economic crisis this causes a type of negative speculation which almost causes a self-fulfilling prophesy. On September 12th 2008 at 9.50am Bloomberg posts a direct link to the Western Mail which gives a city market report. In this report states the following ‘The collapse of a rival operator buoyed holiday giants TUI Travel and Thomas Cook Yesterday as the largest holiday firm went into administration and removed a major competitor from the marketplace’. Now strategically this is seen as a very good time to buy, as Baron Rothschild so eloquently stated that ‘The time to buy is when there is blood on the streets’ however it is difficult to measure the length and time of such a period and therefore as an investment analyst I would only suggest to follow this when you are not in the market at all.

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This graph represents the medium term of 1 year during the period of February 2013 to 2014. In this graph I have used a confirming indicator called the Relative Strength Index developed by J Welles Wilder. This index measures the velocity of a security’s price movement to identify overbought and oversold conditions. We use RSI to recognize potential turning points to help make entry/exit decisions. RSI values are calculated from either closing prices or yields. RSI indicator falling below a value of 30 indicates an oversold condition. A buy signal is usually triggered when the indicator crosses 30 from below. Similarly, an RSI value greater than 70 indicates an overbought condition. A sell signal is usually triggered when the indicator crosses 70 from above.

Analysing this graph we can see that during the period of April – mid July there is a V top and V bottom next to each other. This is a very unusual case, however during this period Bloomberg announced that ‘Climate changes will increasingly affect business’ which explains the V top and V

bottom period. After the Rounded Top highlighted in red between July and October we have a genuine upward trend.

The candle stick in this graph shows the opening and closing prices. Price falls during the opening session, makes a low, then eventually pushes high and doubles in value. At this extreme high point the number of buyers in the market diminishes, thereby creating a vacuum for prices to fall again and retrace to the previous low.

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This graph represents the Short term equity market of 1 month which includes the moving average Conv/Divergence (MACD) and the Fibonacci sequences and retracement lines. MACD was developed by Gerald Appel and it is in a security’s underlying price trend. The theory suggests that when a price is trending, it is expected, from time to time, that speculative forces “test” the trend. MACD shows characteristics of both a trend indicator and an oscillator. While the primary function is to identify turning points in a trend, the level at which signals occur determines the strength of the reading. Therefore when the white line is greater than the red line this indicates an upward trend and when the red and white lines cross it indicates a buy or sell signal.

Analysing the graph from 4th of February to the 25th we can see via the white trend channel that there is a positive upward trend. Bloomberg announced during this time that there were various factors that were contributing to this upward trend such as ‘BME equity trading rising to 20% and Increases by 14% vs the same period a year ago in Jan-Feb’. During the 12th and 14th of February we can see that there is a bullish symmetrical triangle which floats around the between the 61.8% and 31.2% Fibonacci Retracement lines. The Fibonacci H-L Retracement study displays Fibonacci percentage retracement lines on the chart based on the extreme values seen on the chart. These lines often represent support or resistance levels, signaling a possible short-term price reversal before the existing trend continues. The theory of percentage retracements is based on the observation that after a period of market movement in one direction, prices tend to retrace a portion of the previous trend before resuming the move in the original direction. These countertrend moves usually fail at certain predictable percentage levels calculated from the number sequence identified by the 13th century mathematician Leonardo Fibonacci. The set of retracement level are 23.6%, 38.2%, 50%, 61.8%, 76.4%, and 100%. The 50% retracement level,

while not a Fibonacci ratio, is used because of the tendency for an asset to continue in a certain direction if the 50% retracement is exceeded.

Using the OHLC Bar for short term represents an open, high, low, close chart. This is a security chart that clearly shows the opening, high, low and closing prices for a security. This type of chart is often used by technical analysts to spot trends and view stock movements, particularly on a short term basis.

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Equity Index Evaluation

Over the years the Equity index has shown relative movements that suggest during economic downfall the equity Index is not a market to invest in. This is highlighted in the Long and Medium run diagrams. The crisis of 2008 and the additional climate problems between April and July indicate that natural and financial disasters play a huge effect on the possibility of high returns on investments. Furthermore, we can see that in the Medium run diagram the RSI indicates an overboard exit point which further demonstrates climates effects on the FSTE100 UKX market.

However my forecast for the FSTE100 is positive but I would ONLY suggest short to medium run investments. As we can see in the short term graph, by using Fibonacci Retracement lines the 61.8% retracement line almost acts as a new Support line after 17th of February. Using the Fibonacci sequences 21, 34, 55 as moving averages on the retracement lines, we can see that just at the end of the Bullish symmetrical triangle the price rises above the moving averages, suggesting that it is a signal to buy.

Following the positive trend after the 17th of February I believe that short run to medium run investments can equate to long term profits. My reason for this is through the analysis of the MACD. Within the MACD we can see that when prices are increasing the wave stays above the average line, similarly when the wave moves below the average line the price begins to decrease. This is shown when the price moves from 61.8% retracement line at a price of 6700 to below the 50% retracement line at a price of 6600. This is correspondently shown on the MACD pattern during the 13th and 14th of February.

Following this pattern throughout the month of February we can see, just as the graph suggests that the waves have spent more time above the average line than below it. This gives me reason to believe that as the economic trade continues to strengthen and the economy begins to regain stability the price will break through the resistance line which I have drawn in yellow and possibly grow to a price of 6900 as coming to the end of this period the price was at 6830.27.

To strengthen my argument, analysing the medium run graph and using the RSI I can see that there are more suggested entry points then exit points. This is highlighted by the green marks (entry point) and the red marks (exit point). The ascending triangle in the medium run further supports this argument that there is a high probability that the price will continue to increase yet again breaking through the support line and reaching the price of 6900.

In conclusion to my forecast prediction I strongly believe that in the following 3-6 months we will see a genuine increase in prices following the ascending triangle pattern based on the ascending triangle we see in the medium run graph.

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Foreign Exchange Currency

This graph represents Long term foreign exchange currency for the Euro against the Dollar for a 6 year period. Using Bollinger Bands and a 5 day moving average I have been able to identify the various price patterns within the time period. Bollinger Bands, developed by John Bollinger, are defined using the standard deviation from a simple moving average, an excellent measure of price volatility. The study plots lines above and below the moving average at a specified number of standard deviations. This study is used to identify periods of high and low volatility, as well as periods when prices are at extreme and possibly unstable levels. These variable width bands become narrower during less volatile periods and wider during more volatile periods. Consumer Federal Current 10-Year 10-Year GDP Prices Budget Account Jobless Note Note YOY% YOY% % GDP % GDP Rate Nominal Real G7 & Eurozone U.S. 2.1% 5.4% -3.6% -6.4% 6.1% 3.71% -1.69% Euro Region 1.4% 3.8% -2.0% 0.0% 7.5% 3.92% 0.12% Japan 0.7% 2.1% -5.2% 3.6% 4.2% 1.45% -0.65% Germany 1.7% 2.9% -3.0% 4.1% 7.6% 3.92% 1.02% France 1.1% 3.2% -2.2% -1.6% 7.2% 4.23% 1.03% Italy 1.5% 3.8% -3.4% -1.6% 6.8% 4.72% 0.92% U.K. 1.5% 4.7% -3.2% -2.2% 5.5% 4.41% -0.29% Canada 1.2% 3.5% 1.8% 2.3% 6.1% 3.77% 0.27%

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This diagram shows the effect of various macroeconomic objectives on the foreign exchange rate, which in this case represents the Euro against the Dollar. As shown in the diagram, as consumer prices 5.4% year on year in the U.S are relatively higher than the Euro region 3.8% this creates a genuine downwards trend as shown in the Long term graph as Euro in terms of the dollar falls by 1.6% year on year. A section of this is highlighted via the red trend channel from 2011 – 2013. The increase in Consumer prices year on year, holding all things equal can equate to the inflation rate rising. This raises the value of the currency of one in terms of another; in this case Euro against the dollar. In our diagram this emphasizes the currencies attractiveness in terms of the ability to compete against another currency. If the dollar rises by 1.6% year on year this makes increases the demand for Euros over the 10 year period. However due to the recent recovery period the Euro in terms of the Dollar is starting to rise entering the 2014 period. This is highlighted via the white trend channel.

This represents the Euro against the Dollar in the Medium run for 2 years using Candle Patterns and Moving Average Oscillator displays. Using the Candle Patterns You can identify and filter the Neutral, Bullish or Bearish Patterns. Red is for Bearish and Green is for Bullish. Where: EL – Bullish Engulfing Line – Indicates a future bullish trend (green) Indicates a future bearish trend (red), HR – Harami and HM - Hanging Man is a Bearish pattern. A Bullish or green candlestick implies that the closing price of the sessions was higher than the opening price. This means that buyers maintained control and prices spent more time pushing higher. However a Bearish or red candlestick implies that the opening price of the session was higher than the closing price. This means that sellers maintained control and prices spent more time pushing lower. The Hanging man (Karakasa) indicates that there is a Bearish reversal found in an upward trend, this is highlighted by the beginning of the positive trend channel period of March 2013. This suggests that sellers take control and post an intra-low; buyers then reverse this before the end of trading which is confirmed via the bearish candle on the following session,

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highlighted by the June period of 2013. The positive upward trend relied on various factors, one of which being that the ‘Dollar had rose sharply against other major currencies after strong figures on the US economy which increased expectations that the Federal Reserve did not expect’. This was posted by the Financial Times via Bloomberg news Announcements on July 5th 2013 at 8.19am.

This graph represents a 6 months Short run analysis using candle patterns, Fibonacci retracement lines as support and resistance lines and his number sequences as moving averages.

The retracement levels are calculated from the Fibonacci sequence, which adds the previous two numbers to form the next number in the series. The first 15 numbers in the sequence are 0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, and 377. The key Fibonacci ratio of 61.8%, often referred to as the golden ratio, represents the convergence of the values of one number divided by the following number of the sequence. The 38.2% ratio is found by dividing one number in the series by the number that is found two places to the right and the 23.6% ratio is found by dividing one number in the series by the number that is three places to the right. It is interesting to note that .382 equal 1.0 minus .618. Thus 1.0 minus .236 results in the last ratio of 76.4%. Fibonacci percentage retracements are used to help determine price objectives. In a strong trend, a minimum retracement is generally around 38%, while in a weak trend the maximum percentage retracement is usually 62%. The complete retracement of a previous bull or bear market marks an important support or resistance area.As we can see Fibonacci retracement line of 61.8% acts as a support line for December 2013 onwards. Based on this support line there is a genuine upward trend. During this period Bloomberg announced that ‘the Euro rises as banks look to shore up balance sheets and that the euro pushed towards a two month high against the dollar on Friday as banks adjusted positions ahead of the year end’.

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Foreign Exchange Currency Evaluation

Focusing on the Medium run for the euro against the dollar I have come to the conclusion that the positive trend in the previous months of November and December may continue for the next month or two depending on the relative implications of Europe’s political problems against the stability of the U.S economy.

I strongly believe that the positive trend that we see in the Medium run will not continue for more than a month of two due to the current political issues in Kiev which is the capital of Ukraine. Ukraine is currently a member of the European Union, which roughly holds 27 countries. The crisis in Ukraine is causing the Euro to become less competitive against the dollar. Due to the amount of countries that hold the Euro as their base currency with a crisis such as this in Kiev it is difficult to see the Euro rising to a competitive level against the dollar anytime soon. Therefore I would suggest staying out of the Foreign Exchange market for investment perusals.

Despite this political implication our graph in the medium run does show some positive trends. The ascending triangle highlighted in red indicates that there is a positive upwards trend in the medium run. Using moving averages of 5,15 and the moving average oscillator we have been able to identify key opportunities to buy and or sell given the right timing and opportunity. By using the MAOD we have been able to determine the type and length of moving average as well as the data, which the moving average applies. In the graph we can see that the fluctuations of the moving graphs seem to be very high and therefore causing an increase in the buying and selling points of the FXIP. Therefore as an investment analysis I believe that these investments should be short term with quick entry and exits in order to reduce losses. However, due to the fluctuations in prices I suggest to use a STOP LOSS at points where there are opportunities to sell; incase, due to high volatility the prices begin to rise. For example as the price bounces from the resistance line highlighted in Pink from 1.2500 to 1200 and then starts to grow, fortunately breaking the previous resistance line and creating a new resistance line highlighted in red at a price of 1.3749 this really does emphasize the fluctuations in price.

In conclusion I believe that due to the current economic crisis in Kiev my forecast will go against what my confirming indicators show, which is a positive upward trend. I believe this problem could last from 3 months up to 1 year if Ukraine does not have a strong political leader to enforce order in the country. Until this issue is resolved I do not believe it is safe to invest in the foreign exchange market (Euro/Dollar) regardless of money management techniques. Although my graph indicates that via the trend channels and ascending triangle price patterns, the price will rise, the political issues in Kiev have caused major trading problems throughout global businesses such as Addidas whose prices hit rock bottom after the news in Ukraine.

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Commodity

This graph represents the Long run commodity evaluation of Gold over a 10-year period. Within this 10-year period we can see that there is a clear positive upwards trend, which starts from 2004 up until 2012. This is relatively understandable seeing as Gold is such a stable commodity. However as we enter the 2013 period we find that we enter into a Rounded Top, which is very rare and takes a very long time to develop, in this case from roughly 2010-2014. In red and white I have highlighted correspondence to the peak in price as well as the aggregate volume and Bollinger bands. Analyzing the Bollinger bands we can see that the price volatility is relatively at its highest when prices are at its highest. This is demonstrated via the red and white trend circles in the graph. I used the Bollinger averages of 30,2,2 to correspond to the volatility of the prices of Gold. I believed by using this confirming indicator we will be able to detect when to buy and sell gold at times when the prices are more or less volatile depending on time period.

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This graph represents the Medium term of the Gold commodity for 1 year. Here I have yet again used Fibonacci retracement lines as support and resistance lines in order to identify patterns in the price.

In this graph we can see that there is a clear negative downwards trend. Surprisingly the price of gold drops very sharply, breaking the support line at the 38.2% retracement line and then settles at the lowest point of Fibonacci’s retracement line, 0%. As the price falls we find that it creates two different types of price patterns; a double top and head and shoulders. As Ian O’Sullivan stated, that double tops ‘confirm a resistance point that has been retested a second time and failed’. This pattern should be seen as a set up for a possible trend reversal, and so traders should wait for the price to break below the neckline before entering the trade. Similarly with Head and Shoulder patterns the top of the head of the movement is formed with volumes dropping and as we can see in this graph the head rests on the 50% Fibonacci retracement line; likewise the right shoulder is formed as the move runs out of momentum and as we can see yet again the left shoulder starts at the lowest point of Fibonacci’s retracement line of 0% but the right shoulder seems to slow down with its momentum only taking it to roughly 23.4% on Fibonacci’s retracement line.

Overall, Gold as a highly rated commodity can be vulnerable to some negative speculation and as we can see in this graph since the sharp price drop in April the price has never really recovered. Bloomberg announced on April 15 2013 at 11.59 am that Gold prices ‘Gold Prices Tumble; Commodity Prices Crumble; Falling Gold; metal is now set for its biggest two-day loss in some 30 years’. During April the volume is high and the price drops sharply this is one of the reasons.

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This graph represents the Gold Commodity over a 6th month short run period. In this graph we have used a Relative Strength Index to identify overbought and oversold conditions. Towards the end of this graph we can see that the RSI indicates an overbought period due to the confidence in the upwards trend from December 16th onwards. This positive trend is also supported by the aggregate volume increase highlighted via the white arrow on the graph. Analyzing our RSI graph we can see that the current price is 63.5097; our RSI indicates that a sell signal is usually triggered when the indicator crosses 70.

Furthermore, buying at the base of our support line at 1200 and selling at a future price of 1400 when the RSI gives us a sell signal when the indicator crosses 70; would give us a percentage profit of 166%. However during the beginning of the September period we can see that there is a genuine downwards trend in the price of Gold. During this period, Bloomberg announced that ‘the Gold commodity is weak and vulnerable below the resistance trend line following its Tuesday failed recovery’. As the downwards trend in price works correspondently to the genuine downward trend in the volume indicators in the RSI; not only can we see via this graph that Gold IS working below the resistance trend line as Bloomberg states, but we can also see that the volume in the RSI is

working below its maximum price of 63.5047.

As this graph shows, the more Gold remains vulnerable to the downside trend, the lower the RSI will be.

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Commodity Evaluation

Focusing on the medium run for Gold as a commodity we can see that there is an overall downward trend and using Fibonacci retracement lines we can also see that the price of gold continues to fall bouncing from a resistance line identified through the retracement lines onto a lower retracement line in the graph. For example the price of Gold starts above the 76.4% retracement line whose price is identified as 1523.34. Due to the sharp fall in the price of Gold, we can see in this graph that the price never fully recovers to its original peak in March.

We can also see in the graph that the aggregate volume is at its highest when prices are falling. This could possibly indicate the unlikelihood of prices ever regaining the heights it enjoyed in March.

Because of the various falls in the price of Gold I strongly believe that the price will fluctuate between the 38.2% and 0% retracement lines and I forecast this to last for another 3 – 6 months. I believe Gold has had a rough year and will continue to do so for the next 3 – 6 months due to the increases in access of Gold and the advancements in technology which allow countries from around the world to access Gold. Developing countries such as China, India and many African emerging countries such as Nigeria for example are starting to invest in technology to access commodities such as Gold, this therefore reduces the price of Gold, shifting the supply of Gold outwards, decreasing the price and increasing the output.

In conclusion, I therefore believe very strongly that Gold will steadily fluctuate between the 38.2% and 0% retracement lines making it difficult to invest in until the access of Gold starts to decrease and the value of Gold starts to rise.

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Conclusion

Overall, I believe currently that the best market to invest in is the FSTE100 as it has shown more of a stable increase over the medium run. The technical analysis used in previous sections provides the evidence that supports this argument.

Reflective Essay

There were various aspects of Bloomberg that I found interesting as well as difficult. At first, annotations were difficult and interpreting the graph. When I first started I only noticed V bottoms, but with practice I was able to advance my knowledge. Furthermore, analyzing the graph and making future predictions were difficult for me as all economic predictions is based on assumptions and constant variables. However in the view of an investment analysis I believe my decisions were accurate and as I learn to use Bloomberg more, I believe I will be more confident and comfortable making these decisions.

References

http://www.investopedia.com/terms/o/ohlcchart.asp

Bloomberg News

Bloomberg Definitions

Bloomberg Candlestick Patterns

Bloomberg Article ‘Fibonacci Numbers Work in Mysterious Ways’

Bloomberg ‘Essentials of Technical Analysis’

Financial Times

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Including Reflective Essay: 2200