Technical Analysis of The Nigerian Stock Market

At the heart of technical analysis of financial markets, especially stock market, is the Dow Theory. It nicely explains the most important trends in the markets -- bulls and bears. Both of these important, primary, trends have three consistent clear phases -- Accumulation phase, Public Participation phase and Distribution phase.

image: fxtradermagazine.com

The image above is the illustration of those phases for a bull market. See how closely the Nigerian Stock Market mirrors this between 2006 to 2008.

In the beginning (of the bull market), most of the activities are by the institutional investors and professional money managers. They strategically accumulate, buying shares of companies that meet their investment strategy requirements. This is the accumulation stage. It is usually after a bear market where majority of the public has been burned by the stock market and have very little interest in the stock market. They are busy trying out other new-in-town hot investment schemes -- from wonder banks to MMM to Bitcoin to helping hands to real estate hot spots. 

As the other investment schemes begin to crash, every investment scheme whether legit or illegit must go through a crash, usually when almost everyone has bought and new buyers are now very scarce, people get burned again and move on. In the end, they will notice that the stock market is rising and again catch the FOMO (fear of missing out) fever. Then the market phase will go from accummulation to public participation. For over a year, the stock market will rise rapidly and the latest talk in buses and parties will be how people are making it in stocks (just as it once was how people were printing money in MMM).

The public frenzy will drive the prices of stocks to unreasonable high levels and the smart money will start selling to the dumb money. Professional investors and institutional investors will start rebalancing their portfolio dumping the overpriced shares on ignorant trend-following public. This is the distribution phase. The stock market will no longer rise rapidly, and mostly go down a bit and come up again (like the US stock market is doing now). People will buy shares through all kinds of means -- directly through brokerage accounts, indirectly through specially designed investment funds and even borrow money to buy stocks (margins). 

Finally, one day, the bull will come to a screeching halt. And everybody will want to sell at the same time. The inevitable happens -- a market crash. And it is the end of the bull market trend.

The bear market trend begins at that distribution phase, and quickly progresses through the phase where the ignorant public are now trying to offload all their stocks (another public participation phase) and ends with a very long uneventful period of market trading at new bottoms before very slowly rising. Then the next bull market trend begins as the smart money comes back to start accumulating again (and that is the phase we are now in the Nigerian stock market).

Nigerian All Share Index from 1998 to today

As you can see in the chart above, the Dow Theory keeps playing out in our Nigerian stock market. And we have obviously begun another bull market trend. Luckily, I have moved camp from the ignorant public side to the smart money side.