Elio D’Amato | from Stockopedia

In our latest podcast episode, we dive deep into the world of technical analysis with Stockopedian Elio D'Amato.

Elio has a rich background in both fundamental and technical analysis. He shares his journey of becoming a "happy smuff" (self-managed unemployed fund) after leaving his previous employer on the cusp of the COVID crisis. Living in Melbourne, the world's most locked-down city, Elio had to find new methods to analyse businesses that suited his style, especially when cash flow from wages stopped.

Technical analysis covers a plethora of methodologies like movong averages, candlesticks, flags, pennants, MACDs, and RSIs. However, Elio emphasizes a simpler approach to technical analysis, which he calls his "momentum journey." This method helps him identify stocks in an up or down trend.

Elio explains how he identifies uptrends and downtrends by looking at higher highs and higher lows versus lower highs and lower lows. He is at pains to point out that Technical Analysis is not a perfect predictor of price movement but it may help to weight the odds in your favour.

Elio's approach combines both fundamental and technical analysis. He uses fundamental criteria like return on invested capital, return on equity, and financial health metrics to identify quality companies. Once he finds a fundamentally strong company, he uses technical analysis to determine the right entry and exit points, ensuring that the stock's price is moving in the right direction.

For those new to technical analysis, Elio suggests starting with simple moving averages. He explains how a 200-day moving average can be a reliable indicator of a stock's long-term trend. If a stock's price is above the 200-day moving average, it indicates that the market appreciates the stock's value. Conversely, if it's below, there might be underlying issues.

The episode also touches on the psychological aspects of investing. Elio talks about the dangers of rear-view mirror investing and the importance of not trying to pick tops and bottoms. Instead, he focuses on capturing the "big chunky bit" of a stock's movement, avoiding significant losses, and maximizing potential gains.

Finally, Elio addresses the plethora of stock tip services and newsletters that promise quick gains. He advises investors to educate themselves and understand their own investment style before subscribing to any service. By doing so, they can make informed decisions that align with their personal investment goals.

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EPISODE TRANSCRIPT

Elio D'Amato - Simplifying Technical Analysis

Chloe: Shares for beginners Phil Muscatello and Fin pods are authorized reps of Money Sherpa. The information in this podcast is general in nature and doesn't take into account your personal situation.

Elio D'Amato: I, uh, am looking at the price to make sure it's going in the right way, but it's still got to make sense to me as a business. So if it doesn't make sense to me as a business, if I have run the rule over, uh, some fundamental criteria that I personally use, like return on invested capital, for example, return on equity, financial health of a business, it's measured by Alderman Z score, and a whole range of other particularly quality measures, as we like to call them. Then if a stock fails that, then I'm not really going to be all that interested.

Phil: G'day and welcome back to shares for beginners. I'm Phil Muscatello. Ever wondered why some stock investors stare at stock charts like they're renaissance masterpieces? What's behind those patterns and lines and squiggles that traders use to read meaning into share price movements? Joining me today is stockopedian Elio D'Amato. G'day, Elio.

Elio D'Amato: Yeah, g'day, Phil. Thanks very much for, uh, talk about very multi layered topic, and I think I'll better set that expectation nice and early for all the listeners out there that if they think they're going to learn everything there is to know about technical analysis just by sitting in on this one podcast, I think they're kidding themselves. Hopefully I ignite interest to research it a little further. But ultimately, as with anything in life, it has to work within your schedule and how you like to apply things. And that's the sort of method I've adopted in, uh, recent times.

Phil: Well, it is one of those things that a lot of people treat it as a science, and there's all sorts of ways of looking at, there's people who like candlesticks, there's people who like all kinds of patterns, you know, those flags and pennants and things like that. And then there's indicators like MaCDs and RSI's and all of that sort of thing. But today, we're really just going to break down a very simplistic way of looking at technical analysis, which I believe is what you're happiest using.

Elio D'Amato: Yeah, that's correct. And I've articulated this to, uh, our members, and I've called it my momentum journey. And basically it all emerged when I departed my previous employer, where I did so on the cusp of the COVID crisis. And of course, I live in Melbourne, which is the most locked down city in the entire world, so couldn't have picked better timing. But I decided to become a self employed, or self managed unemployed fund, or a smuff, as I like to call it, which is basically like a, uh, typical SMSF, just without the tax benefits. Either way, it became critically important that I needed something a little more, because, of course, once you've got cash flow that keeps coming in in the form of wages, and that stops, and all of a sudden, you have to live off what you got, the game changes significantly, and therefore, that saw me look at new methods and new means of analyzing businesses that may very well suit my style. And I. I have to be grateful to the lessons of our previous clients, who taught me a hell of a lot. And then, obviously, through my own readings, I was able to add a little bit more to that. So through that, I've developed that momentum journey. How I've come to use charts within my broader strategy. For a large percentage of my portfolio, there's still some that I hold till death to us part. You know, I've sort of held for over ten years, or I've got golden handcuffs, and basically tax office won't let me let them go even if I wanted to. But the vast majority of stocks on our held have a element of this momentum, or technical analysis, as you call it, as part of that holding strategy. And I feel quite comfortable that the method that I've developed, though simplistic, or relatively simplistic, actually works with the way I like to roll. And basically, I've been quite successful at it. And yes, a happy smuff for many a year now, notwithstanding this current role with stockopedia, but prior to that, quite happy, and, yes, remaining happy, and will probably continue to do so.

Phil: So you seem to straddle the religious divide, because for some people in the industry, it's a religious divide between fundamental and technical analysis. I'm kind of assuming that you have kind of put this very light overlay of technical analysis over what's really fundamentally fundamental analysis on your partner.

Elio D'Amato: Yeah, look, it's interesting because, of course, that's, uh, black versus white, when the reality is it's grey. And I suppose you might argue whether it's a little bit more black rather than a little bit more white, but either way, in my simplistic mind, the color is what it is. So you're right. I mean, I come from a fundamental training. I can do hundreds of lines of spreadsheet, calculator, a cash future cash flow value, which is discounted back at the present rate in order to come up with a value for a stock. But I'm not going to do that. And to be frank, when I left my previous employer, I lost a hell of a lot of information. I couldn't access. Those broker reports, their insights, all that additional intelligence, and the only thing that

00:05:00

Elio D'Amato: I could rely on is basically what everyone relies on. And I'm not going to the Internet here. Actually, the only thing I can rely on is the actual movement in price. And therefore, understanding how that moves is somewhat important, particularly when you see stocks where, for all intents and purposes, they look great. And even though you'll probably be right over the long term, how long term is your long term? And I think that is where the technical analysis comes in, where it allows you to basically think less and make more money, where, yes, you can use, say, fundamentals to try to identify potential opportunities. But ultimately, if the market disagrees with you, you either have to be exceptionally strong in your conviction that you disagree with the market, or you can run with it. And I've gone with the run with because I don't trust myself at the moment, given the sources of information I have available to me, to necessarily suggest that the market is wrong in any shape or form. Rather, uh, I will just assume the market is right. And I work with that, understanding that there are factors driving that price movement along the way. So even though on the surface, it may appear that technical analysis only plays a smaller role, actually, it probably plays a little bit more of a larger role nowadays, as, uh, again, I'm trying to block off that noise filter that really I've been trying to do over, uh, the last two decades of investing, and I don't think I'll ever master, to be honest.

Phil: So tell us about how you use technical analysis, or your very simplified form of it. Uh, is this in terms of purchasing decisions or when to sell kind of decisions?

Elio D'Amato: Yeah. Basically, all I really wanted to know when it came to stocks is I wanted to know whether a stock was going up or whether a stock was going down or whether a stock was going sideways. I know that might sound simplistic, but obviously I needed something to hang my coat on, as it were. I needed a coat hanger. That actually allowed me to identify that. So, dow theory is a basic tenement of all technical analysis, whereby a series of higher highs and higher lows determines an uptrend versus a series of lower highs and lower lows, which determines a downtrend. So once I'm able to manage that and understand that, I can then apply things like, for example, where there could be future events happening, so where there could be periods of support or what we would call periods of resistance. Not that they necessarily always occur, of course, this is the share market, and there's always a bit of ice, uh, quenching that you need to do. But ultimately, you want to identify a particular price level or point where there could be some volatility or something could possibly occur. And I found that relative to my way of investing, that using structural levels of support. So those actual pivot points, I mean, just think about it. If I asked you to close your eyes right now and just think about a share price graph, the thing that will jump out at you is, ah, ziggin zags. I mean, it's a universal image, irrespective of the fact that you might not see any axies, you might not see any price values or a calendar or any of that sort of stuff. In your mind's eye, as it were, in what a share price growth looks like, there's a reason for that, and that's because actual share price growths look like that. And therefore, understanding where those pivot points occur and what they actually mean when they're either breached or when that support is held is a pretty key tenement as far as I'm concerned. So once I understood what determined the price going up or whether that price was going down, and then identifying where there were previous levels of support and resistance, as it were, all key levels where there could be some price action occurring, I then wanted to know, effectively, how could I improve my odds of actually picking a winner? Because of course, you don't necessarily pick 100% of the winners, and we'll no doubt talk about this a little later.

Phil: Uh, and it's not foolproof either, is it? This is no foolproof. This is just trying to weight the odds a little bit more in your favor, isn't it?

Elio D'Amato: Yeah, that's correct, because you're never going to get it right 100% of the time. In fact, if you have a buy and hold strategy, provided of course, your stock doesn't go broke, you will probably come out in front at the end it based on ten years or 20 years down the track. So not looking at a, say, a one month, three month, or six month time frame frame if you're looking at multi years, because you got to be in the market, let's face it, you make Money being in the market more than you're out of it. But what you need to do, in my view, is you need to make sure you don't take those big terminal losses, because, I mean, I lived through the GFC, so, uh, other than being an acronym, I remember how scary it was for investors back then. The market just went southeast for some 16 months, and really, there was no reprieve for anyone. There was no v shaped recovery, as it were. It was basically just a hard slog, not only trying to run a business, but also trying to convince investors

00:10:00

Elio D'Amato: that it was an opportunity. And, of course, again, that was easy to say when I had the cash flow coming in, but it definitely got a lot harder when that cash flow stops coming in and you have to deal with what you have, as it were. So this is not about necessarily improving your odds, guaranteeing that you'll get success 100% of the time. But if you're a long only manager of your own money, you can only ever lose 100% in your stock. All that will be capped relative to where your stop loss actually sits. That, of course, is, in my view, surpassed by the unlimited potential gain that you could possibly make on a stock if you're in the right one and the thing keeps going in the right direction. And, yes, again, I wanted to try to identify that, things that would hopefully identify that this could be the starting series versus just a flash in the pan type of spike, which you can see every now and then, and therefore, that can impact the price you get in at a stock and ultimately where you get out. So I think you make a really important point, Phil. It's not 100% foolproof. In fact, you will probably introduce more losers into your portfolio than you would have otherwise under a fundamental buy and hold type strategy. But ultimately, if you can look for the right markers, right indicators, and make sure you know the share price is going in the right direction, then you can get the odds working in your favor, and you can therefore start to achieve those gains consistently in all market conditions, irrespective of what the ticket code is.

Phil: So do you start off with things like simple moving averages? Is that the basis of where you get started?

Elio D'Amato: Well, uh, that is a great way to start, actually.

Phil: And I was just going to point out here, we're getting into the weeds because this is a highly visual thing that we're talking about. So we're going to try and paint the picture with words.

Elio D'Amato: Yeah. Which of, uh, course, is very hard. And, yeah, that's one of those misconceptions, that pictures are easy, but we'll get to that a little bit later. The idea with simple moving averages, though, is just that. It's a simple moving average. So it's a moving average over a set time period. And, uh, obviously, if the price has been going up over time, then the average will be going up as well, and vice versa, if the price is going down over time, the average will go down too. It is considered a bit of a lagging indicator and not necessarily the most responsive. But geez, let me tell you, Phil, looking at it can sometimes, as you say, that picture paints a thousand words. And in fact, if you can find a longer time moving average that's going in the right direction, and then even better, you find your price currently trading above, then that can give you a great sense of confidence that at the very least, the market appreciates and realizes the value that you actually see in that business at this point in time. And I like to often have my share prices trade above a 200 day moving average. For example, in essence, if the price isn't above the 200 day moving average. So there's nothing scientific about this one. There's definitely nothing too insightful. But you know what? I, uh, not going to necessarily spend the days upon weeks or months to find out that the market's been wrong over the last half a year, as it were. Rather, I just want to know what the market has thought about it over the last half year. And therefore, where does the price currently sit now? And one of those basic screens that I like to implement is the price has got to be, uh, above the 200 day moving average. If it's not, then you got to worry. And that can then extend to if you have a moving average, which says over a shorter time period, like a 50 day moving average. So these are common moving averages you would have heard about either, you know, the golden cross, as it were, basically, when a 50 day average crosses a 200 day average, I digress, and I'm not going to bore you to snores with that one. But what I like to see often is I like to see the two lines moving in tandem. I want to see the 200 day moving average going up, and I want to see the 50 day moving average going up. When I see periods where they start to close in on one another, then that tells me I've got to do a bit more work. Something's going on here. What am I missing? What don't I understand? Why is it that over the short term, the viewers turn more pessimistic on the stock relative to its longer term performance? And once I use that as my trigger to go, do my investigation that can possibly also uncover other things. So I suppose, long story short, Phil, yes, it's used as a nice and definitely one of the basic tenements of technical analysis. You got to understand moving averages. How you use them, though, is a wide, varied book. But again, I use them as an indicator as to when I need to look, uh, more into a stock and understand what's driving it more.

Phil: And many brokerage platforms will give you the ability to set up charts and try it out. I mean, it's a very simple thing just to look at the chart. I mean, I've done it many times on my Comsec

00:15:00

Phil: account where you just go to the stock and then you go and look at the charting and you can say, you know, you get this whole menu of hundreds of different kinds of indicators, but just go to a simple moving average and just try a 200 day, apply it against the share price over one year, two years, three years, five years, and just have a look what's happening. It's just a great way to learn.

Elio D'Amato: Yeah, it is a great way to learn. You're 100% right there. And that's the beauty of something like technical analysis, is that it's just maths, right? It's accessible to you as it is to the other thousands of computers that are out there. And quite frankly, you're only limited by your imagination. So if you want to entertain the kids over a weekend, by all means, there's a stack of indicators that will do that. But if you're a realist, more like I am, with somewhat limited time and limited mental capacity to consider things like that, then obviously keeping it very simple works. And often that picture paints a thousand stories is so true. And just doing simple acts like you described, where you just casually scroll through, have a look at different stocks that you're familiar with, look at how their prices moved around those time periods, they can be life lessons that you carry forever. And that's why I like charts, because it's non discriminatory. It does. You don't need to be an ultra rich person or a sophisticated investor, uh, to do well out of it. You're right. Charts are available on your online broker. They're available everywhere. Hell, you can google it and the topic just sprouts up everywhere with different types of interpretations and knowledge and the like.

Phil: And what a rabbit hole it becomes, huh?

Elio D'Amato: Yeah, that's right. Exactly. And that's where it becomes the rabbit hole. So I think rather than starting with what indicator is the best, because that's what everyone wants to know. Right. So everyone wants to know, what's the silver bullet? Give me the pill.

Phil: Right.

Elio D'Amato: Uh, whatever the pill is that gives me the solution, no problem. But I think that's the wrong question. Once investors actually understand what they want to do, then it's about identifying the factors that suit them. So there will be a stack of technical indicators that don't work for me because I don't want to invest like that. Whereas when I do want to invest in a particular way within certain timeframes, etc, etc. Then I know what I'm looking for because I know what indicators do work for. And, uh, to me that's a very liberating experience to have, rather than a dogmatic sort of approach where there's only my way or the highway. But of course, there are many faiths in this church we call investing. And, uh, far be it for me to tell anyone who's right or who's wrong, ultimately the price will do that. And if you're fortunate enough, over time, the dividends will also pay you back too.

Phil: Is it worth looking at an extreme example? I mean, thinking of stocks at the moment that are going through momentum issues, let's say Lend Lease, for example, would it show up on a chart? I mean, it obviously would be trading below its 200 day moving average, I'm sure. Does it become really obvious what's going with the price action when you apply a moving average against it?

Elio D'Amato: Yeah, look, it does. I mean, there's always a risk when it comes to rear view mirror investing that, yes, sometimes you're saying the obvious, uh, prices that go southeast, throw in a Telstra, that's another one that's had a pretty terrible twelve months as well. And I think investors will sit there and go, uh, well, there's nothing insightful to be gleaming at this point, and that's true. I wouldn't necessarily suggest that saying that a stock like Lindley sorted Telstra being under pressure at the moment is anything insightful at all, quite frankly. But what you want to be told is you want to know that that's occurring earlier. You want to know that it's already started. The important bit is not trying to pick tops and bottoms, and that's not what technical analysis is about, or the one I follow anyway. We don't try to pick tops and bottoms. We just try to take the big chunky bit as it goes up and avoid the big chunky bit as it goes down. And if we can do that and develop our various techniques in order to assist us to do that, that is true. And I urge people to look at lender Lease because of course you don't have to be a chartist to know that it's been a pretty tough twelve months. But if you use your various indicators relative to the way you want to invest, okay, so don't look at things that you're just not going to employ. So if you're looking at intraday charts and very tight stops etc. Etc. And you're never going to apply them, then just don't bother, don't do them, leave them for the other guy, right? Don't worry about them. But if you find approaches and various techniques that assist you and aid you relative to the way you want to roll, then obviously you can then apply them to a Lend Lease. And yes, whilst everyone will say, every blind Freddy will admit, yeah, it's been down, that's not the important bit. The important bit is when was it indicating that it could potentially be? When were the risks elevated? When should we have been looking at this stock closely? Because of course, Harry, hindsight is not a successful investing strategy, particularly if you hold stocks like Telstra and Lend Lease over the last twelve months.

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Phil: So looking forward, does it have predictive power? Technical analysis?

Elio D'Amato: Well, ok, so past performance is no indicator of future performance, as I consistently have to remind our members. But then again, prices often move in a rhythm where you sit there and you go hang on, I've heard that song before and maybe back from the fifties, but you know what? It does sound the same. And we, whilst we have to say that the actual performance itself, they do behave in very similar ways. Now, there is a predictive science, or what is claimed to be predictive, and the simplest way for me to articulate it is you get things like an AI, for example, like thinking like a human, understanding what's going to happen next, you know, things like driverless cars and all that sort of stuff. So I'm not necessarily reinventing the wheel here. I don't apply it according to that way because in my view, I don't want to predict where the price is going to be in six months or twelve months time. What I want to do is I want to know when that sentiment is changing, when it was positive has gone to negative, when the risks are elevated and when the risks are low, but there are various things like Fibonacci waves and a whole range of other Gantt charts and a whole range of other things which try to add an element of predictability to technical analysis. But having looked at more charts, and I'd like to admit over the many years that I've done this stuff, I probably will say that I think the best effort is going to be spent on identifying the right type of move for you relative rather than trying to predict where prices are. Because, yes, whilst there might have grown a, uh, billion dollar industry out there by analysts trying to do it using fundamentals, well, it could possibly do that with technical analysis as well, until the next announcement, and then you got to go back into the dark room and calculate all. I don't have the time, patience or inclination to do that, Phil, so therefore, I just want to know, is it going up and is it going down relative to the way I want to go about investing? And therefore, if I like this business, tick and then tick and then I'm in.

Phil: M so tell us about the process. Like, when you're looking at a company and you're becoming interested in the company, is this one of the first things you look at, or are you looking at the fundamentals and then looking to see if this is being translated onto a chart and therefore momentum?

Elio D'Amato: Yeah, it's a little bit of a and a little bit of b, Phil, I'd hate to say it. I mean, as you heard me say, I want to see that a stock is trading above its 200 day moving average as a basic tenement. It is by no means so.

Phil: Uh, Elio, that's a deal breaker for you, isn't?

Elio D'Amato: Yeah. If you're looking at a stock from the initial stage. So if you're wanting to get in screening, look, there's 2000 stocks that are out there. What do I care if ABC or def or Ghi? 5%. In fact, if I held all three, I'd still just achieve 5% relative to just holding one and getting 5% and I get the same return. So I'm less concerned about what the actual business does. And it's one of those sanity checks that I have that at the very least, if the price is above the 200 day moving average, then that tells me there is some sanity in this business. Doesn't mean it's necessarily all roses. Could it be an opportunity? There might be an opportunity for a stock below a 200 day moving average, even if you've got the gumption and done the research to identify that. But as part of your initial screening process, ensuring that the price is above the 200 day moving average is relevant. And then once you do that, once you get a list of stocks that appear sane, you then, of course, run the brush over them in regards to what sector they're in. Are, uh, they price takers or price makers, which is relatively important to this and in this current market, to be quite frank, when we're trading at close to all time highs, why on earth would I invest any time or effort when I've got a business to run into stocks that are going southeast, when basically blind Freddie can pick a stock running northeast? I mean, never mistake a bull market for brains, but we do. When times are like this, and therefore, when a stock's going the other way, in an environment like this, you got to just slap yourself on the fire and go, what the hell am I actually doing? Why am I doing this to myself? Again, a bit of Harry hindsight there, and probably should have made that decision a little earlier. Ah, but in essence, that's what we want to avoid, because the markets do zig and zag. We know that they will have their periods of over exuberance and over pessimism. And the reality is often somewhere in between. We are incredibly optimistic at the moment. So do I tell everyone to sell? Of course not. It's the easiest time to make money as you're getting these gains. But of course, you need to know when to get out, and you need to know what indicators will help you

00:25:00

Elio D'Amato: get out at that right time, or at least at a time that works for you. Uh, because again, remembering, we're not picking tops or bottoms here. So in that essence, then, when I am looking at that yet, I am looking at price to make sure it's going in the right way. But it's still got to make sense to me as a business. So if it doesn't make sense to me as a business, if I have run the rule over some fundamental criteria that I personally use, like return on invested capital, for example, return on equity, financial health of a business as measured by Altman, Z score, and a whole range of other particularly quality measures, as we like to call them, then if a stock fails that, then I'm not really going to be all that interested. And then after I have identified a quality company, then I go back to the charts to identify a particular entry and more importantly, the exit point, because I need to know when I'm going to get out of a stock even before I buy it that way. And that helps me curb my losses. If the trade goes against me. And whilst I like to say that I had a magic wand and they all went the right way. The probabilities are that when I buy a stock. The price is going to go down. So how far, uh, down before I know I got that trade wrong? That's always the ultimate question.

Phil: And then, in terms of the long term holdings in your portfolio. Do you ever run any technical analysis over that. Just to say, well, okay. Despite having held this and many gains over many years. Are there times when you look at it and go, hang on. Maybe I should apply a little bit of technical analysis. Because the momentum is really trending in the wrong direction?

Elio D'Amato: No, because generally the longer term holdings I have. Are really just that. They sort of ignore the fact that you are, uh, operating in an environment and a marketplace. Where people trade stocks every single day. You really have to block that out. In effect, the price becomes inconsequential. I know. As silly as that might sound, that is the reality. The longer term holdings I don't apply any technical analysis to my technical analysis. Will tend to be on stock holdings which last between one month and six months. Which is a, uh. Very typical of what they would call the swing trader that is out there. And, therefore, that would take that position. But in stocks like Pilbara minerals, for example. A stock that I've held since it was in the single digit setback. And now is in the three dollar, 40 odd. Uh. I'm just not going to sell that based on a chart. Because, one, the tax bill will probably send me broke to start with. But two, because I have a fundamental belief in their operations and that business. And, therefore, as a result, I will continue to hold, irrespective of the fact that you get that price volatility at times. I will continue to maintain that. So then we can look at one of its competitors. Like a mineral resources, for example. Whom, um, I haven't had the same experience with. And not held for as long. Now, if I'm going to make a purchase decision today. I need to look at the entry points using a chart, as it were. To assist me to time my entries and my exits out of that business. Those exits, as I say, will be set before I actually enter into that business. Because whilst one might believe in the long term story. The price may very well perform opposite. And I don't have the capital, as it were. To necessarily sit there and just stick with it through thick and thin. Irrespective of my belief in that business. So, no, there are two very distinct strategies Phil. And for my long term holdings, which have been multi year holdings, I don't apply any charts at all.

Phil: There's many services, newsletters, stock tip services that are, uh, selling a system for investors to be able to make very, very fast, large short term gains with all kinds, uh, all kinds of claims.

What do you think investors should be wary of when being confronted with this social media and in online media? Because this sort of stuff, once you start taking an interest in the share market, you're going to get inundated with these kind of deals and offers.

Elio D'Amato: Yeah, spot on. And I think it's important to remember that if you're going to embark in the world of technical analysis or using a, uh, tool that would assist you in regards to your timing of entry and exit, that you do just that, go in with that mindset. If you're not paying for a product, you are the product. So be wary of hearing on social media those stocks that are running up in a trend, etc, etc. Because inevitably there'll be ulterior motives behind those suggestions. If you want to educate yourself so that you can apply technical analysis yourself, there is a great independent organization by the name of the Australian Technical Analysis association at AAA, you can google everyone, it'll be there. And there is a great pool of independent, relatively accessible information,

00:30:00

Elio D'Amato: definitely not written for the, uh, rocket scientists, as it were, that you can implement yourselves in order to assess the companies that you're in and whether the trade is moving or not. Once you become familiar with the basic concept of technical analysis and some of the basic ratios which an organization like the ATAA covers in spades. And seriously, if they fail, you just google it. Because as you say, there's a litany of free information out there that is available to people, then by all means, you can then pursue what sort of service and offering may very well aid you in meeting your objective. But personally, I wouldn't make that decision until I was well grounded in what I was after. Once I know what I'm after, and once I know how I want to roll and the indicators that I possibly want to use, then you can look for a service provider that assists you in that regard, versus alternatively, you just go to a tip sheet and basically you just pick what they say and you just hope that the guy is a good tipper. If he is or she isn't, then you're going to really suffer and live and die by those recommendations. And in my mind, as a hardened DIY investor, uh, if I'm going to lose Money, I'm going to lose Money my way, Phil. And that means that I'm willing to do the research in order to ultimately make the right decision in my personal interests rather than someone else's.

Phil: I don't want to get too spiritual here, but there are some technical people who believe that every piece of information you need to know about a company is reflected in the price chart. You've obviously heard that, haven't you?

Elio D'Amato: Yeah, of course, I've heard that a thousand times. And to a degree that's true, because as a fundamental analyst, when you're sitting there looking at the numbers, they might look great. The story sounds sweet. You can't find any fault with this business at all, but the price is going down. Now, if you have access to institutional research, to management of a company, to be able to go to the actual site, kick the tires, as it were, then by all means you could develop an understanding as to whether the market is right or wrong. But for the majority of us, as keyboard warriors, as we sit there and just look at this price of the stock moving up and down every day, and really we don't understand why it's occurring. Then from that perspective, we can't develop the conviction needed to suggest that the market is wrong. Therefore, you have to accept that the everything relating to the business that's currently known and is to be expected as well. Remember, price is two factor here, and that all of that is encapsulated within the current price, all its future cash flows discounted back to a present value today. All of that has been taken into consideration for a particular stock, and that is reflected in its price. That's the physical manifestation, as it were, and that's how we see it. So you can, if you want to, spend an ordinant amount of time in order to decipher as to whether the market's wrong on its position on a particular business, or you can just look at the price and take that as being a, uh, quasi acceptance or denial in regards to whether the market thinks this stock is good for the future or whether it's poor. And often I find the trend will tell you more than the absolute price itself. Because if I tell you, Phil, that a stock is worth $3, that will mean nothing to you. But if I tell you that I think the stock that is worth $3 today was actually $2 a month ago, versus the stock which is dollar three today, and I thought it was worth $4 a week ago, well, that paints a different picture and that you can actually formulate a few in regards to price without having to go into the minutiae, the other stuff. Because if you want, Phil, I can sit there and I can, I don't know, calculate the forecast future value of toilet paper consumption in the Pilbara for BHP for the next five years or so and discount that back to a present value today. But I don't think that serves us retail investors any benefits at all. And that is why the price becomes that sole focus. Because in theory that should reflect all known information at the moment will be reflected in that price. And that's why all our exchanges and the governments and our laws are so strict in regards to concepts like insider trading, for example. Because the last thing you want to do is have an inefficient market where it's not operating in a way where all the relevant information is available. And therefore you can seize opportunities like that. One would argue that if you do know all the information that's available and everything is being disclosed to the market, then really the price is the actual representation of the business at the moment. And therefore you can utilize that as

00:35:00

Elio D'Amato: a uh. Somewhat an anchor, as it were, in regards to where the future price may move.

Phil: Do you use candlesticks at all?

Elio D'Amato: Look, candlesticks were developed in the 16th century, I believe by a bunch of japanese wolfies, as it were, who were trying to determine the price of salmon.

Phil: Which I thought it was japanese. And uh, rice traders.

Elio D'Amato: I don't know. It might have been. There could have been something like that. I've got no idea what it was, Phil. But it's a pretty simple prospect that it actually works. And that is you just plot where the price of a stock opened at. You price how attract during the day and you priced where it closed at. And you ask whether I use them. I prefer to look at my charts in candlestick form. So that way I'm not necessarily trying to do anything that hasn't been invented before. I'm not necessarily changing anything of the past either. But I do like to see how a stock traded, whilst your normal behavior is that you will have a, you know, a body, as it were, and two sticks either, uh, side on the top or bottom. Sometimes it could be just a full bar. Sometimes it can be a really big bar or sometimes no bar at all. And sometimes that can also tell you a little bit in regards to price action. But again, that's not necessarily how I look at it because I'm not a day trader. But then again, I do like to look at candlesticks because I feel that it gives me a better representation as to how the price has moved over a set timeframe.

Phil: And you'd set those candlesticks like it can be on a five minute basis all the way up to a year candlestick, can't it?

Elio D'Amato: Yeah, that's right. And your broker does that as well. And if you've got current live data available and you're using, say, I don't know, uh, let's say a trading view or even a meta stock or something like that, you will get those data points in there. And again, five minutes, definitely not for me. Right. That is way too short term, um, for me. And I would never look at a five minute chart, as it were. But by all means, by some investors who are particularly nervous about their holdings or taking incredibly big positions, or those that are taking very risky positions, then by all means, that may very well be relevant. And often you will see those tighter time periods used on people that are, ah, trading forex, for example. So geared up, uh, financial or geared up, foreign exchange instrument instruments, which, you know, obviously carry their risks if the trade moves against you. And therefore you need to keep a really tight leash on that. But, yeah, of course, that's the beauty of candlesticks. You can use them on a five minute, ten minute, one week, one day, one month even. You can use them on that timeframe as well. It's the same principle, even on a monthly bar. Where did it, uh, open? Where did it close? Where was the high? Where was the low? And that is basically what a candlestick tries to identify, and depending on your personal tastes, will determine what timeframe you use it over.

Phil: We've been talking through the whole interview about price and where the price is at any particular time. Does volume play any part in it as well?

Elio D'Amato: Look, that's a really interesting question, because I'm told that volume is incredibly important. However, when I look at the list of all the indicators that are out there, the vast majority relate to price only, and none of them take into account volume. So I think that there is a risk that we could put a little too overemphasis on volume, but it does tell a story, particularly if you get divergences. So if a stock is trending up quite strongly and the volume is going up with it, then that would indicate that that upward trend is being supported by volume, which is supporting that price rise. And that is the same. If the price is going down consistently and the volume is going up on that business, then that would indicate that, yes, selling pressure is building, and therefore the downtrend. Well, the downward movement is somewhat validated. And a particular indicator that I like to look at, Phil, here, is on balance, volume, for example, where, again, I'm just looking for divergence, because if I see a share price trend, which is going up, but then I see, on balance, volume going down at the same time, then that indicates to me that the price move may not necessarily be as heavily committed by investors as what the price would indicate, not necessarily the sole sell decision, but it does contribute to my overall story and my overall strategy as well in regards to what I do. In fact, one of the indicators I use will, is the average true range. Now, that doesn't necessarily consider volume, uh, per such, but that considers volatility, in particular, the volatility of price and how you apply that over the current price, and also volume, if you, uh, so wish. And therefore, you can obviously get an insight in regards to where the stock is currently trending. Again, not a sole entry or exit decision maker, but definitely part of that story builder that you need to do. So I look at that volume as being part of the story,

00:40:00

Elio D'Amato: but I don't see it as being the sole reason of the story. And I know that can also be contradictory to many views where they tell you that volume is incredibly important when it comes to analyzing price. But in my experience, having looked at all these charts over time, it's a nice to know, not a need to know, as far as I'm concerned, anyway.

Phil: Okay, well, just before we finish off, would you like to remind listeners of the end of financial year Stockopedian sale?

Elio D'Amato: Yeah, sure. Sorry.

Phil: Before we even get onto that, uh, Ellie, I just wanted to say I love the format of the new newsletter with the Stockopedia Express headline.

Elio D'Amato: Yeah, the master, the masthead M. That's right. And everyone's free to get on board and download that. You can go to why dot stockapedia.com forward slash free newsletter. And I think you can download that for free. But there is also an end of financial year sale at the moment, as many providers have out there, so you can claim your tax deduction, as it were. But Stockapedia is really not all that expensive. And I've just talked a, about, you know, breakout momentum, for example. Well, there's quality investors, there's value investors. You know, they've covered the whole range of it, as it were. And all of that is encapsulated within Stockpedia. So the end of financial year sale is now on. You can save between 15 and 25% on the value of Stockapedia. Not only that, but we'll also make available a free copy of Roger Montgomery's valuable book. There is also the free strategy map ebook from Ed Croft and Megan Boxall, who have spent a large amount of time writing that out to, uh, again, identify how you want to roll with the market. Because I really think that investors need to actually understand that first, rather than worrying about where's the silver bullet, because there's a thousand bullets out there. But if they're not for the right, uh, a bad analogy, as it were, uh, but they're not for the right firearm, then they're going to be completely useless. So once you understand what it is you want to do and how you want to roll, and that is so important, then you can identify the other stuff. And that's where stockaped becomes so relevant, because, uh, you can get a full coverage of the different ways you want to invest, as it were. You can identify stocks based on that. And at the moment, with our special deals that we have available, the discount plus the free books, you can build on your knowledge. Because knowledge is power. Forearmed is forewarned. So there is definitely no reason why you should be blindsided by any performance in any stock. If you have a tool like stockapedia by your side. And as you say, Phil, the end of financial year, it's not only because of the discount and the offering, but because of the tax deduction as well. And thank you for the, uh, free newsletter plug, because, yes, that's a great little resource. I feel for everyday investors.

Phil: So we'll be talking again on weekend Watch lists. So I want to say thank you as well for you and Chris contributing to the podcast, because I know listeners are loving hearing about all the individual stocks that we talk about each week, in and out.

Elio D'Amato: Yeah, no, I hope everyone enjoys it. It's a great way to kick off the weekend if you ask me, and we definitely love pulling it together. And it's amazing. You can find the buy case for every stock, but then you can find the sell case for every stock as well. And ultimately, in my view, and the whole topic of this podcast has been the price will be paint a thousand picture of a thousand words. And that is where it can become an incredibly powerful ally in the hands of a DIY investor.

Phil: Elio Di Mato, thanks very much for joining me today.

Elio D'Amato: Thank you, Phil.

Chloe: Thanks for listening to shares for beginners. You can find more@sharesforbeginners.com if you enjoy listening, please take a moment to rate a review in your podcast player or tell a friend who might want to learn more about investing for their future.

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