Buying and selling signal

THE price movement of a stock is dependent on the demand and supply of the stock, which in turn is influenced by the buyers’ buying interest and the sellers’ selling interest.
Every buyer or seller has different purposes when entering into a trade. The followings are general “rules”, which provide us with some hints on whether the stock price will probably go up or down.
Investors should not view these “rules” as a foolproof method that will hold true all the time. There are certain occasions that market manipulators might be using these “rules” to mislead the general public.

Rule 1: Buyers are showing small orders and sellers are showing big orders. However, the stock prices are holding quite well – buy signal.

When we want to purchase a stock, we will call our remisiers to check on buying or selling orders on the stock. A lot of selling orders with only a few buying orders on the stock may imply that the stock price would come down.
However, if the stock prices are holding quite well, it could mean there are some net buyers accumulating the stock.
The reason for this is buyers may refuse to show their buying orders to attract sellers to sell at the buyers’ buying price.
Showing high buying orders may delay selling interest, as sellers will wait for the buyers to buy at their selling price. Hence, it is a “buy” signal if we notice the above rule on any stock.
On the other hand, if buyers have big orders and sellers have small orders while the stock price continues to drop, it might be a “sell” signal that this stock has some big sellers that are not willing to show their selling orders but they need to sell the stock now.
Showing big selling orders may cause panic on the stock. Hence, to sell at higher prices, sellers will try to hide their selling orders.
Logically, if a stock has a strong buying interest, the stock price should go up instead of come down. Hence, the weakening stock price may imply that sellers outnumber buyers.

Rule 2: The overall market is weak but your stock price is moving against the overall market trend – buy signal.

In a down market, if a stock that you own is inching up steadily despite the overall weak stock market sentiment, this may imply that there are some net buyers on this stock.
We view this as a “buy” signal where buyers are eagerly accumulating the stock in spite of the weak market. In most instances, the stock price will move higher the moment the overall market sentiment recovers.
In contrast, if the overall market is moving up but your stock is being beaten down, it is a “sell” signal. Normally, insiders are aware of certain crucial bad news that is still not available to the market yet.

Rule 3: Stocks carry a lot of bad news and are trading at high volume but stock price remains stable – buy signal.

Sometimes a certain stock is facing huge bad news but the stock price is holding on quite well. Normally, it may imply that buyers are not worried about the market concerns on this stock. The current stock price may have discounted all the bad news.
In contrast, if a stock, despite having all the good news in the media, continues to see its price decline, this is a “sell” signal that shows there are certain sellers who have some concerns over the stock, but the overall market is still not aware of the news.

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One Thing That Is Certain In Life

Understanding the stock market rules by Ooi Kok Hwa

In this article, we will highlight a few common and important ‘rules’ that are crucial to most investors.

Your purchase price is irrelevant when you consider selling a stock.
Most people always find it difficult to sell a stock at a price lower than the purchase price because this means making a loss.For example, if you purchase a stock at 90 sen, you will not sell the stock lower than 90 sen as this means a loss to you.You will most likely hold on to it until you are able to sell it at higher than 90 sen.Unfortunately, your stock never remembers how much you have paid for it. You have memory of the purchase price but not the stock.As a result, some investors end up holding on to lousy stocks with poor fundamentals.The longer you hold on to these stocks, the higher the losses that you will incur.Hence, the timing to sell stocks with poor fundamental will depend very much on when you are able to admit that you have made a mistake purchasing them.

Deciding whether to sell when the price is falling or continue to hold on to it with the hope it will recover and break even depends on the fundamentals of the stock.The target selling price for a stock should be based on the future prospects of the company instead of the price that you paid for the stock.Thus, you need to “sell the losers and let the winners run”.For stocks with good value, you should consider holding them for a longer time.Lately, some second liners with good fundamentals have been hammered down to very low levels. Some of them are even selling at lower than the owner’s cost (lower than book value).However, not many investors are excited about those stocks although they are currently selling at a very cheap valuation.Most investors worry that the price will go down further after they have bought it.It is very hard to predict the market bottom. Based on our observation, certain fundamentally strong stocks may have temporarily found bottom despite the recent market sell down.We think it is a good time to nibble on some good value stocks and keep them for the long term.

Even though the price will get cheaper than your purchase price tomorrow, we believe the current price should not be too far from the bottom.Investors need to remember that the returns are based on the selling price. You may purchase the stock at a relatively higher price during a downtrend.However, if the stock has great potential and you are patient enough to hold on and wait until the market recovers, you can still get higher returns than someone who may be lucky to purchase this stock at the lowest price but sell it too early.As mentioned earlier, buying before the market reaches bottom is “buy low, sell high”.However, to a certain group of investors it is safer to buy only when the market has found the bottom and started to recover rather than trying to predict where the market bottom is.They prefer to buy the stock at a higher price because they believe they can sell it at a higher price. This is “buy high, sell higher”.For those who prefer the “buy low, sell high” strategy, as you are buying before the market is touches bottom, you need to stagger your purchases so that you have enough bullets to average down your purchase price if the stock price drops further.For those who prefer to “buy high, sell higher”, they need to prepare themselves mentally to buy at higher stock prices.This might be a problem to investors as they are not willing to pay for higher stock prices as they always remember the recent lowest prices.They may end up buying nothing but still hoping the stock price will come down one day.

Ooi Kok Hwa is a licensed investment adviser and managing partner of MRR Consulting.Thanks for your Sun Tzu's Art of War on Share Market seminar recently.

Test Your Brain Power

There are 7 girls in a bus. Each girl has 7 backpacks. In each backpack, there are 7 big cats. For every big cat there are 7 little cats. Question: How many legs are there in the bus?
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