AMP - Where to Place your Faith?

A question that I am often asked when providing traders with the education they need to succeed is how much importance to place on news and fundamental indicators. Well this week’s announcement from AMP should speak volumes on how most retail traders should be performing their analysis.

AMP on Thursday announced the second largest loss in Australian company history of A$5.54 billion. Most participants in the market without any financial background would agree that when an announcement like this occurs then the share price is likely to fall right?

Wrong. The AMP share price climbed on this news and reading the analysts' views in the media they were happy with this result, it was not as bad as expected! Makes you wonder what they were expecting? This makes it hard for those who don’t have an inside eye on how a company is performing and that certainly can be baffling for those who don’t possess a thorough understanding of a company’s accounts and how to read them. As an exercise you can read the 6 page document released on the ASX website detailing this announcement. My gut feel is that like me, most who read it may be left a little confused with the information. This style of analysis, commonly referred to as fundamental analysis has some limitations for the retail investor. It is impossible for you to keep up on all the information companies provide and then making real sense of it is the next challenge.

Turning our focus now to technical analysis we can start to see some benefits to the trader to use techniques that don’t require an expansive knowledge to be effective. Looking at a chart of a company is the easiest way to see this information. I use swing charts as they remove a lot of the “noise” that can come with charting. An important point is shown on the chart below, we have started to see higher tops and higher bottoms on the swing chart for AMP. This is a good signal that an uptrend may be starting to form, we have to go back to Mar/Apr 2003 to see the last time we had two successive higher tops and higher bottoms.

For AMP over the last two years, it has been a sellers market with consistent lower swing tops and bottoms on the swing chart. For those using ABC Trading rules you may have noticed more short trades than long, which makes perfect sense as the swing chart is keeping you out of trading against the trend. An ABC long trade was signalled for entry on the 27 Feb 04 at $4.83. The chart below outlines the trade and the market position as of Friday’s close.

After the entry on the long side was made AMP hovered around the entry zone making relatively small ranges for the next 3 days. Then came the announcement, certainly I am not saying that we could have expected such a move after bad news has been released. In keeping with our trading plan we were trading with the current trend and my experience is with good technical reasoning you can often take advantage of an announcement like this.

For those who are familiar with milestone theory, safe exit could have been taken on Friday at $5.30, a potential profit of $0.47.

So where would you place your faith in the market when it comes to analysis? For me the technical aspects provide a simpler way of managing information and selecting opportunities. I do not completely ignore all fundamentals, however, I am selective in their use or misuse as the case may be. As you can see with AMP not all bad news is bad for its share price, so rather than relying solely on the news equip yourself with skills that allow you to make decisions based on the facts at hand that we can all access easily - that is the share price.

Good Trading

Aaron Lynch