Technical Analysis for China Southern Airlines.

Introduction

China Southern Airlines is majority owned by the Chinese state but traded on the
Shanghai, Hong Kong and New York stock exchanges as well. CSA is China’s largest
airline company and has been for the last 30 years. In 1997, China Southern Airlines
debuted on both the New York and Hong Kong Stock Exchanges and in 2003, the airline
was listed on the Shanghai Stock Exchange. China Southern Airlines successively
merged with, took over shareholding stocks in and joined the equity in numerous Chinese
carriers. We will in this paper have look at the technical performance of China Airlines
stock. Technical analysis focuses on “technical analysis of securities is based on graphs
and charts of historical market data rather than on fundamental values”. (University of
Liverpool, 2009)

The following graph shows the historical movement of the CSA share price;

Source; Yahoo finance

Trends
Trends in stock price development are normally split in three categories; Short term
trends, medium term trends and long term trends. The short term trends are trends over a
period Long term trends are those trends that are observed over a period of a year or
more, medium term trends are those observed during a period of one up to three month,
and short term trends are those that are only observed during a period of less than a
month. Cleary a long term trend has more significant value than short term trends. Within
the period of a long term trend it might very well be possible to observe shorter term
trends that have an opposite direction then the longer term trend. Finally it’s worth
mentioning that trends can brake.

We can observe in the 5 year historical trends of CSA four periods of different long term
trends; in the period up to mid 2006 the trend was a slight down ward trend, which broke
into an upward long term trend which lasted until the third quarter of 2007 at which point
the trend broke and developed into a downward trend that lasted up to the end of 2008,
since then the trend has been a slight upward trend again

Support, Resistance and the Channel in between

Technical analysts will, when observing a trend will recognize a level of support and a
level of resistance and expect the security to trade within these two values at any time.
The stock is expected to remain its trend until its value “breaks beyond one of the levels,
in which case traders can expect a sharp move in the direction of the break” (Jansen,
Langager and Murphy). We can see in the historical graph how this happened in 2006; in
the period leading up to mid 2006 the trend was down ward between a resistance and
support level that are indicated by the red lines in the graph below. In mid 2006 the price
broke the resistance line and this indicated a break in the long term trend in this direction,
which can be observed in the period of upward trend that then followed.

Source; Yahoo finance

The opposite pattern could be seen in late 2007, when the price broke through the support
level and this indicated a reversal in trend , which indeed happened and the trend was
down ward trend up to end of 2008. This is clarified in the graph below;
Source; Yahoo finance

Volumes
Monitoring volume is considered as important as monitoring price. Changes in traded
volumes can often indicate that trends are going to break. It is often said that for example
when traded volumes drop in upward trend, this indicates that the upward trend is coming
to an end. The volume table can be seen below the graph that shows the price. “Volume is
closely monitored by technicians and chartists to form ideas on upcoming trend reversals.
If volume is starting to decrease in an uptrend, it is usually a sign that the upward run is
about to end” (Jansen, Langager and Murphy).

Other indicators of Trend Reversals

Technical analysts recognize a number of other signals that potentially indicate upcoming
trend reversals; on example is for the descending triangle; movement within this triangle
indicate that the price of the stock is “trying” to break through the support level but
doesn’t directly succeed. It does indicate though that the trend will reverse soon as the
price does manage to break through the support level. This can graphically be seen in the
graph below;
In the descending triangle the lower trend line is horizontal, while to upper trend line is
descending; this is often seen as an indication that the trend will become bearish, and
analyst would expect the trend line to soon show a negative breakthrough. The opposite
trend would indicate a pending positive breakthrough.

Another example that is often observed is a rounding bottom, sometime also referred to
as a saucer bottom, this is a “long-term reversal pattern that signals a shift from a
downward trend to an upward trend”. This pattern can also be observed in the CSA graph
at the time the trend reversed in 2006, this can be graphically seen in the graph below;

Source; Yahoo Finance

Moving Averages

The fact that prices in the short term fluctuate a lot makes them sometimes hard to
interpret. In order to get around this and create more stable lines the analysts often use
moving average prices. The moving averages used vary by the broadness of the corridor
of prices that are taken into the calculation, which can vary from 5 days up to 200 days,
as well as the methodology used to calculate the average; the difference in methodology
is the weight allocated to each of the prices in the corridor; the weighting could be simple
(SMA) (meaning every observation gets the same weight) it could be linear (meaning the
weight allocated to each observation reduces linearly with times, or a third method would
reduce weighting exponentially for prices further in history (EMA). (Jansen, Langager
and Murphy). Replacing exponential moving average methods, newer method use a
weighted approach between SMAs (WSMA) with different durations. This method has
been shown to “outperform SMA in practice” and has the additional benefit that is more
“intuitive to use than the exponential method” (Boylan and Johnston, 2003). Both EMA
and WSMA have been show to be more robust tools in forecasting movements than SMA
method.

The graph below shows both the simple moving average price (red line) and the
exponential moving average prices (green line). The graph uses the 200 days moving
average, which is often seen as a strong support line in an upward trend and a strong
resistance line in a downward trend. This seems to be in accordance with the observation
in the graph below. Also it can be observed that the crossing of the actual share price
through the 200 days moving average is good indication that the long term trend is
reversing.

References

Boylan and Johnston (2003) Optimality and Robustness of Combinations of Moving

Averages in The Journal of the Operational Research Society, Vol. 54, No. 1 (Jan., 2003),
pp. 109-115 available at http://www.jstor.org.ezproxy.liv.ac.uk/stable/822755?seq=6
(accessed on June 6, 2009)

Janssen, Langager, Murphy (no date) Technical Analysis, Introduction [internet] available
at http://www.investopedia.com/university/technical/default.asp (accessed on June 6,
2009)