Share Synthesis

I will attempt to blend a combination of both fundamental analysis and technical analysis to decide on the entry and position sizing for the stock Tat Hong (Listed on Singapore).

1. Entry Point

Fundamentals
Based on the earlier fundamental analysis I have done, I have derived an intrinsic value of 0.61 by analyzing the past few years financial results of Tat Hong and also the present economic conditions . Model might not be accurate as a majority of the inputs(i.e growth rate, discount rate) requires judgments and can't be quantify. Based on relative valuation like P/E, P/S, I have derived an estimated value of  approximately 0.50... 

I will proceed to the second step only if the fundamental is intact or there's some potential growth which I can foresee. For details, refer to my earlier post.

Technicals
I dont intend to use technicals to predict price but instead I hope to understand more on the market psychology by analyzing the momentum.. In order to avoid short term trends and noise, I decided to set a longer time horizon for the indicators used. Some indicators which I will use are like Moving Average, ADX and ATR..

Moving Average : Used a total 3 mv line (14d,25d and long term 200d)... This is still in experiment phase therefore numbers might not be ideal. Note that up to this point, the short period mv line crossed the longer period one which symbolizes a bullish trend..  Curently the price is trading above both lines and slightly below the 200d one therefore if the price breaks the 200d, it will be a big bullish indicator.

ADX : Currently at 16 which indicates a weak trend.. Strong trend if its above 40. When adx begins to strengthen from below 20 and moves above 20, it is a sign that the trading range is ending and a trend is developing.

Based on the above 2 factors, I think this stock may be gaining momentum, consolidating and an uptrend might soon prevail.. 
















There seems to be a divergence between my intrinsic value and the overall trend.. My fundamental technical analysis tells me to buy the stock between the range of 0.61 meanwhile technical analysis is telling me this stock might be going uptrend soon. Is this variance due to the different time horizon used or  is it due to my overly pessimistic analysis? Will the stock reinforce itself, ignoring my expectation and surge or will it self correct and plunge instead?  Deducting my estimated value from the current , its approximately $0.055 difference.. Its a 9% variance so assuming I am to buy now , this 9% variance can help me determine my position which I am discussing next.

2. Position Sizing .

I will attempt to use the ATR method which I posted earlier to determine my position... I will be using a 50d ATR to estimate the volatile and it is currently at 0.028. Below are the steps I need to take to derive the position.

- Determine the amount of money in account
Assuming I have $25 000

- Determine the amount to risk
Note that there is a 9% variance between my estimated value and the curent price ..  Following is a table which I am using to set the risk.

OverValued (Estimated > Current)
<10% variance = 3% risk
>10 % and <20% variance = 2% risk
> 20% and <25% variance = 1% risk
>30 % = wont invest.

UnderValued(Estimated
<10% variance = 3.5% risk
>10 % and <20% variance = 4% risk
> 20% and <25% variance = 4.5% risk
>30 % = 5% risk

I will set a 3% risk in this case.

- Find out the ATR

Multiply ATR by 2(static)
0.028 * 2 = 0.056

- Derive the position by taking amount to risk divide by the above sum

750 / 0.056 =13,392shares
                        ~~ 14 lots.

I will continue my exit point and hypothesis of a good case and worst case scenario in my next post.