Technical Analysis in Vietnam s Equity Market This article analyses the usefulness of technical analysis in Vietnam s equity market. It starts of by giving a brief overview of the equity market and some of the basic information that is useful for foreign investors. It then moves on to apply the Dow Theory, which states that the market moves in distinct phases, into the Vietnam market. Finally, the article will examine the implications of some regulations by the Vietnam government on technical analysis and price actions. An overview to Vietnam equities market: The Vietnam equities market consists of two major stock exchanges, the Ho Chi Minh City Stock Exchange (HOSE) and the Hanoi Stock Exchange (HNX). The indexes tracking the two markets are the VN-INDEX and HNX-INDEX respectively. As of 28th Oct 1012, there are 329 companies listed the one of the two stock exchanges. The total market capitalization is 660.7 billion VND (equivalent to 31 billion USD). The products available for trading are Vietnam equities, government bonds as well as corporate bonds. To participate in the market, foreign investors are required to open an account in one of the local brokerage firms. There is currently a quota of 60% Foreign Room, which limits the maximum buying amount that foreign investors in one day. In addition, there are some other basic rules and guidelines for trading in the 2 markets, as listed below: Exchange HOSE HNX Opening hours: Morning: 9h-11h30 Afternoon: 13h-13h45 Morning: 9h-11h30 Afternoon: 13h-13h45 Price limits: 5% 7% Types of order: Limit Order, At-the-Opening Limit Order (9h-9h15), At-the Closing (13h-14h15), Market Order Lot size 10 units 100 units
Summary of VN-INDEX movement from 2000 to 2012 Since the market has been established in 2000, it has competed one typical cycle according to the Dow Theory. In particular, the theory states that the market has 3 phrases: the accumulation phrases, the public participation phrases and the distribution phrases. Accordingly, the development of the VN-INDEX can be divided into 5 major time period: -From 2000 to 2004 -From 2004 to 2007 -From 2008 to the present Figure: Historical movement of the VN-INDEX Accumulation period Public participation period Distribu tion period Recovery/ New cycle From 2000 to 2004, the Vietnam equities market was in its infancy. There were only 24 listed companies, and the daily volume traded was low. The market was in the accumulation period. From 2004 to 2007, the market entered the public phase, whereby the number of listed companies increased. Retail investors started to participate, improving volume as a result. In this period, VN-INDEX increased from a 52-day average of 250 to 1170. The top was formed during 2007, where VN-INDEX was traded in the 900-1100 range.
Starting from 2008, the market entered the distribution phases, fuelled by the global economic recession and the collapse of major financial institutions in the US. VN-INDEX fell to 235, the lowest in 3 years. Since then, it has recovered to 430 in 2012. At the present, in the mid-term, the market is currently moving sideways, and the index was traded at the 380-430 range. This is a sign that the market is in the accumulation phase of a new cycle, which is usually followed by the run. Thus, it could be a great opportunity for long-term investor to enter the market. Unique characteristics that undermine the usefulness of technical analysis: In the Vietnam equity market, there are certain rules and regulations that might affect traders who rely on technical analysis. T+3 Rule: The T+3 Rule, shorthanded for shorthand for "trade date plus three days", refers to the restriction on traders to not close their positions before 3 days have passed since their entry. In particular, once a buy order is matched, the stock will only be tradable three days after. Likewise, once a sell order is matched, the trader will only receive his money after three days. There are several implications of this rule on the price movement of the market. Firstly, there is a higher risk in having to hold the securities for a longer period, since longer time frame can result in higher probability of uncertain events happening. This might drive out short-term traders, who have low tolerance to uncertainty. Secondly, the T+3 rule causes unusual movement in price and thus, hinders the use of charts and technical analysis. This is because the T+3 rule results in a situation whereby short-term traders tends to close their position right after three days. Thus, it is not unusual for prices to move in waves of three-day periods. Any significant bullish price movement resulting from news such as dividend announcements or good performance will be most likely tested immediately three days after the announcement
. Figure: HOSE:ITA daily chart. Price tends to move in waves of 3-day length Restriction on short selling: Short selling is the process where traders borrow and sell shares and only buy them back later, hopefully at a lower price, so as to return the originally-borrowed stocks. This practice, however, is banned in Vietnam. The reason for such ban is to prevent a Short Squeeze, or a sudden upward move in price. In a short-selling, the profit is limited to the difference between the initial selling price and subsequent buying price of the shares. However, if price rises after a short sell, the maximum loss incurred can be unlimited. Comparing to a long position, where the maximum loss is limited to the share value in cases price drop to zero, a short position is riskier for traders. Therefore, traders tend to reverse their trade immediately if price goes up, causing the Short Squeeze in the process. However, banning short selling also leads to a negative implication for investors and traders, namely higher liquidity risk. In a long-only market, investors can only profit when the market moves upward. However, during a down-trend market, such as the period from 2007 to 2011 in the Vietnam equities market, there are much less opportunities to long so traders tend to stay outside the market and turn to more bullish instruments such as gold. As a
result, volume is at a lower level than when short selling is allowed. This poses liquidity risk to traders who are holding a position and want to exit the market, as their selling orders are not met with the respective buying orders. This is evidence in the bearish period after 2006, where volume was at a ten-year low of 10 million shares per day, compared to the average volume of 40 million shares. Thus, traders who want to close their positions might find be unable to do so, and have to adjust their order, resulting in a less profitable trade. 5% limit: To protect investors from volatility risk, HOSE and HNX set a rule limiting the spread to 5% the previous closing price for HOSE and 7% for HNX. To illustrate, the VNM stock closed at 127000VND on 30 Oct 2012. On the next day, 31 Oct 2012, the maximum ask price was 133500VND and minimum bid price was 120000VND. There will be no sudden movement in the market. In the technical chart, this is reflected in the form of fewer spikes. Support and resistance also tend to hold for a longer period of time, as price takes a longer time to move toward support and resistance level. This increases the confidence of traders in the strengths of the support and resistance. The policy also reduces panic selling or buying, which in turn further contributes to the strength of support and resistance. Moreover, by the time there is a significant movement, the effect of the news on market sentiment will be somewhat faded, thus reducing the overall effect of the news on price. While the policy helps to reduce volatility in price movement, it only delays the changes and not totally eliminates it. The market s sentiments, whether negative or positive, will be eventually accounted for in the later period. Moreover, since the spread is small, in a bullish market, there will be a lot of sessions where the stock is traded at the maximum price but at a volume. This is because although the demand is high, buyers can only compete for the stock by placing the highest possible ask price, which might not be a good price for a lot of sellers. In the technical chart, there will be a lot of full candlesticks, which usually indicate the bulls are having control of the market. However, this might not be the case if the limiting spread is not in place. Thus, the use of volume candlesticks to recognize pattern might not be applicable here.
Conclusion: It is concluded that the traditional use of technical analysis might not be applicable to the Vietnam equities market due to these aforementioned regulations. The T+3 rule and the 5% limit rule caused price to move in an unique manner, whereas the banning of short selling result in noticeable drop in volume in bearish market. Moreover, these regulations also increase some types of risk for short term traders, namely liquidity risk and higher uncertainty. Pham Minh Tri This research material has been prepared by NUS Invest. NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest. The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. This report is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice. 2013 NUS Invest