Technical Analysis / Sector Analysis

For many years a good way to pick stocks was to compare its performance relative to others in the same sector.  To be thorough you would also need to compare different sectors to see which way the sectors were moving.  All of this added up to many scans and many hours spent studying charts to see how the stocks and sectors compared.    Not anymore, in this article I’ll show you a way that you can use Sector Maps to quickly identify stocks that are worth more detailed analysis.

Set the Scene

I would classify myself as a relatively short term trader.  I like to take a position, set a stop and as my trade moves into profit follow the stop up fairly tightly.  Sometimes this means that I am out again very quickly, but if the market moves, I get to stay in for a bit longer.  My main method of analysis centres on Gann Squares and geometry, but this takes a lot of time and while I also run a business I cannot analyse all the stocks in this manner.  So how do I pick the stocks that I want to analyse and hopefully trade?  Well this is where I use the Sector Map in Market Analyst.

What is the Sector Map

The Sector Map is essentially a three dimensional way to view the rise and fall of all stocks and sectors in a market.  There have been traditional maps for some time that have shown the capitalisation and growth by size and colour, but the third dimension allows me to see growth (or contraction) for two different time frames.  Perhaps this will be easier with some pictures.

The picture below shows the state of ASX shares on the 23rd June 2009.   

Mostly Red so immediately I see that the sentiment on the whole market was a bit sour.  Each surface in the map represents a single stock, the physical size tells me how “big” the company is, or in technical terms, its capitalisation.  So in the top left corner you can see the ASX’s biggest square which is BHP.  

The colour of each surface tells me how that stock has performed over the last week.  Green surfaces tell me that its price has gone up, and a red surface reveals that the price has gone down.  The intensity of the colour grades the change in price for me.  As an example the bright red surface in the top centre of the map shows me that VII (Vietnam Industries Inc) dropped by 27%over the week. The biggest loser that day.  

The height of each surface tells me how the price of each stock has moved over the last 3 months.  Each sector also shows the 3 month growth of the sector, but you really need to see that on the video below as it is difficult to show in a picture.

So how do I use it

Obviously how you use Sector Maps will depend on your personal philosophy.  Mine is one where I am searching for stocks whose value has plummeted, and then I do some further research on the stocks that I find, to see if I think that they will rebound.  If you would prefer to wait for the stocks to move up, you could use this just as well, you would be waiting for some green surfaces to reveal this trend.

I like to find a sector that has had some growth, like at this time it was the Energy Sector.  On the sector map I hold down shift and Click my mouse in the Energy area and it will “Zoom in” to show me only the stocks that are in that sector.  Then I “grab” the Sector Map with the mouse and move it around, looking at the relative heights and colours of all the stocks in the sector.

The three images below are a result of the rotation of the Sector Map.   

Once I am looking end on (the last image) I can see that while the sector has improved over the last three months (revealed by its height off the plane) there are some stocks that have performed really badly in that same time.  As I move my mouse over the surfaces I can view the details as shown below.

For me, CTP is a standout. Its sector is performing well but something has happened to make this one not perform.  At this point I right click on the surface and Open the chart for further analysis.

By the time I saw this chart the stock was already making a bounce back but after doing my Gann Analysis and a quick search on the ASX web site to see why this fall was happening, I was confident that this was a good buy.  The stock went sideways for a couple of weeks but it never took out the low of the 23rd, and allowed me to sell on the next retracement for a comfortable profit.

Not all stocks behave this nicely, sometimes they are Red on the Sector Map and they stay that way.  But the Sector Map makes it really easy for me to find the stocks that I am most interested in, and then from there do my detailed analysis to see if I want to take a trade or not. Of course, so long as you apply sound Money Management strategies in your trading then you can continue to trade for a long time even when the markets have turned against you.

As the Sector Map is a difficult concept to visualise in 2D pictures, I have included a link to the Sector Map video on the Market Analyst tips page here - http://www.market-analyst.com/video-quick-tips?fbid=15
  

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