FTSE AIM All-Share at long-term support

22nd Jan '16 by tomomo

20 comments 13327 reads

People with an interest in technical analysis and UK small caps will probably already have noticed that the AIM All-Share index has fallen back to a long-term rising support line from 2010 (green line on the chart below).

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Support lines enable one to look at the current market situation in binary terms: either support will be "respected" (again), or it will not.

If support is respected this time, the upward-pointing green support line will remain intact, and the ongoing ambiguous market environment (a series of higher lows, but also a series of lower highs) will remain in place.

If, on the other hand, the upward support line does not effectively "provide support" on this occasion, the character of the market will have changed from ambiguous to more or less negative. The key level to watch will be 647.87, the low in June 2010, from which both the green support line and the blue horizontal line are drawn on the chart.

A decisive break of this level (as in a weekly close a few points below the blue line) would indicate a much more negative market environment.

Is all this worth anything in practical terms? I personally would put the value somewhere in the region of "not a lot but not nothing either". I'd be waiting to see what happens with the green support line before committing new money to this market, and if green support "fails" I'd be inclined to carry on waiting, looking for some indication that the market might have bottomed.

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Rusty2

22nd Jan '16

How does the Aim AllShare compare with the Aim100?

tomomo

AIM 100 has a horizontal support band also dating from June 2010. This is in the region of 2850-2900. It is not currently in play. I don't have AIM 100 on the charting package I normally use, but this (below) shows the broad picture.

OK I see.

To be honest I don't think charts and support levels really work for the Aim, for the FT100 yes probably they do, I don't many investors look at Aim charts and many brokers don't cover the Aim market. Problem is with the Aim too many companies come and go.

I not sure what you mean by "work". I'm not trying to suggest that the existence of the upward-pointing support line on the AIM All-Share makes it more likely than not that the decline in the index level will halt at this point.

My suggestion is merely that if it doesn't halt here then this indicates that the market has changed character somewhat. (But you may be right to be sceptical even of this application of TA.)

By work I meant, that levels on Aim do not actually imply anything. Is it weighted like the FT100, so if ASOS (LON:ASC) goes up 20% it will have a large effect on the level?

In reply to herbie47, post #5

You may be right that breach of support levels doesn't imply anything for the AIM All-Share. I can't come back at you with empirical evidence -- the index is in any case not old enough to provide such evidence. I guess it comes down to prior conviction in the general value of TA.

I don't, though, buy your argument that TA is less likely to work for the AIM All-Share because it is dominated by the larger companies. It is a cap-weighted index, I agree. But ASOS has a market cap which is only about 10X that of the 50th largest company listed on AIM, whereas the corresponding figure for the FTSE 100 is approximately 20X. And of course there are over 1000 companies listed on AIM, as opposed to a mere 100 in the FTSE 100.

(A 20% move in ASOS -- the example you cite -- would produce a move of about 0.9% in the AIM All-Share index.)

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Ok thanks for that information. Yes ASOS (LON:ASC) has come down a lot.

pka

24th Jan '16

To summarise this article:

Technical Analysis suggests that the AIM All Share Index will either continue falling or it has reached a bottom.

25th Jan '16

You may be right to disagree with me and/or technical analysis, but you've misrepresented the content of my original post. Correct or incorrect, useful or useless, it wasn't simply vacuous (as it would be if your summary were accurate).

A more accurate summary of my original post would read as follows. The AIM All-Share has hitherto respected an upward-pointing support line drawn from a low made in June 2010. If it were to fail to respect this support line on the present occasion then that would constitute a reason to see the character of the market as having changed somewhat. If it were to proceed to take out all the lows made following June 2010 and then the June 2010 low itself, that would provide confirmation of a change in the character of the market.

The market is currently (Thursday 21st and Friday 22nd) showing signs of finding support at the level of the rising support line. This little bounce may (or may not) be short-lived, but the fact that there is some bounce at this level is positive: a preponderance of buying has occurred at a price level indicated as "cheap" by the prior behaviour of the market, so there is not presently evidence that the market has changed character.

The chart below shows daily candles interacting with the green support line which I drew on the weekly chart (i.e. the chart that featured in my original post).

Tomomo, Thanks for your response - the meaning of your original article is clearer to me now.

However, is there any evidence that this type of Technical Analysis has any predictive power?

Furthermore, one could draw a variety of support lines on your original graph, some of which have already been broken and some which haven't; why should the support line you chose to draw be the significant one?

I'm not a good person to ask about the evidence base for support lines -- it's not something I've looked into. As you probably know there is quite a lot of academic material about the relation of prior price action to future price action -- this is, in part, what Stockopedia's Momentum Rank is based on. This evidence is compatible with, but does not directly support, the use of support and resistance lines on charts.

If much of the value of charting-style TA (if value there be) lies in enhancing understanding of what is currently happening in the market (which is the way I mainly seek to use it myself) then it isn't particularly amenable to empirical testing. I believe some people who regard TA in a more directly predictive vein ("if X-price pattern then probably Y-price movement") have tested TA patterns for their predictive value, but I'm up on that at all.

The "variety of support lines" objection you advance is quite a common objection but I've never found it very persuasive. Of course, if support and resistance lines drawn on charts really were drawn pretty much arbitrarily, and if different people really were inclined to draw conflicting lines, then it'd be a strong line of objection; but in my experience that isn't the case. I think the objection must mainly be made by people who reject TA pretty much a priori, since I can't see how people who have actually worked with charts could suppose support and resistance lines are so nearly arbitrary.

Is there really an equally plausible but conflicting alternative candidate for a long-term support line for the AIM All-Share index? Or indeed several such conflicting alternatives? I can't see them myself. Could you draw them on the chart to substantiate your claim?

29th Jan '16

So, a week on from the initial post in this thread ... support has held on this occasion.

Actually it has held in pretty much textbook fashion.

The green line on the chart below is the support line shown in the initial post, but this time shown on a daily chart.

The textbook features are

(1) That although price dipped below the level of the support line on Wednesday 20th and Thursday 21st, it did not close below that line.

(2) That the start of a recovery in the RSI(14) from an "oversold" level of 24 on Monday 18th preceded the recovery in price from the low hit on Thursday 21st ("positive divergence"). In other words, that even as price was falling further, negative momentum was already declining from a somewhat extreme level.

(3) That the large red candle produced by quite low volume on Wednesday 20th was followed by a small "bullish harami" produced by significantly higher volume on Thursday 21st. (Shown on the chart below.) This suggested an exhaustion of selling pressure might have occurred, with the remaining sellers now meeting an influx of willing buyers.

I'm aware that for many people who use this discussion board bullish haramis are less palatable than bulls**t salamis. I'm not trying to evangelise for TA. But if you happen to be one of those credulous souls who, like me, thinks there may be something in some parts of TA, then I think the conclusion you should draw from the fact that support has held on this occasion is that the ambiguous character of the FTSE AIM All-Share since mid 2010 (a rising support line, coupled with a series of lower highs) remains in place. It's not great, but it could've been worse: support might not have held.

Ken Lowes

3rd Feb '16

Keeping it simple-- It looks as though the index is still in a downtrend which started with the high Jan 2011, I see what you mean by the shallow support , but it might be the support given at the 50% Fibonacci level. What could be interesting is the triangle with an explosion to the upside between now and July 2016. Thoughts?

6th Feb '16

Ken to my way of thinking if you've got lower highs and higher lows you haven't got either an up-trend or a down-trend.

There is a neat falling resistance line from May 08's high at 1036 through the highs in Feb 11 (969) and Mar 14 (900). At some point before Nov 2023, when the support and resistance lines meet, price is going to have to break either rising support or falling resistance!

More immediately, the candle for last Friday, 29th Jan, supported by the Bank of Japan's surprise move to negative rates, didn't look massively strong, though the day and week did end bang on their high. And this past week neither increasing scepticism about any further Fed hikes, nor the MPC's unanimous vote and Carney's "easy decision" remarks on Thursday was sufficient to provide upward momentum. It wouldn't be surprising if the support line were tested again in the near future.

Tomomo Sorry I am looking at two periods, the all time high in 2000 and the most recent major move from 2011 and I see a continuous bear market with lower high's and apart from the current lower low's. The most recent move is the base formation which commenced from a low in March 2009,( didn't take out the high of July 2007, so still a bear formation) which petered out Jan 2011. That having been said you are right about the support and as the angle coming down is supposed to be weaker than the support (hence forming the triangle} I think the rule suggests a break to the upside. But I gave up on T/A years ago apart from major support and trends. The way I am reading things and your analysis has helped by pointing out the support, is as follows. We are in a bear market correcting the excesses of the last eight years, the FTSE 100 is no longer the lead indicator the FTSE 250 has acceded the throne with it's spectacular rise since 2008. The FTSE 250 has a perfect 5 legs ( Elliott Principle but the fifth is a bit short to be certain, but what's new in that ) The three wave correction is in play and will probably end around the 12000 mark. Now if that is July this year it would be a perfect rocket ship for the Aim All Share to burst through the triangle. I could be wrong but I'm sticking with it until I see the FTSE 250 make a major run to the upside. And then I will tell myself it isn't over and will therefore miss the next major leg up and a continuation of the bull run. I never learn, but I am right some times.!!!

12th Feb '16

The bounce off long-term support has proved to be very short-lived.

The index closed below the support line on Tuesday 9th, "re-checked" support from below on Wednesday 10th, and then moved lower on Thursday 11th.

The tiny doji today (Friday 12th) is not encouraging when considered in relation to the scale of the bounce in the broad UK market, as measured by the +2.73% move in the FTSE All-Share.

The long-term succession of higher lows, accompanied by lower highs, has ended.

There remains the possibility of support at and above the July 2010 low of 648 (thick blue line on the monthly chart below), but the low from October 2014 at 669 (thin blue line) has already been broken.

Personally I am averse to putting new money into this market until there is some indication on the chart that the index has bottomed. (Some of what I do investing-wise is to put a set amount of new money into AIM shares at regular intervals, and I won't stop doing this whatever the chart does; but aside from this prescribed, regular investment, I won't be increasing my exposure to this market until the chart looks better.)

The index may bottom or stabilise at the 650-ish level of the July 2010 low; in any case it will be worth watching what happens around that level. If the index were to simply slice through that potential support level I'd see that as pretty damn bearish.

Nick Ray

13th Feb '16

There's something odd/interesting about the AIM index compared with the mainstream indices.

This graph was produced using Google. For the interactive version click here

MCX is the FTSE350 index; AIM1 is AIM100; ASXX is all-share excluding investment companies; AXX is the AIM all-share index.

What we see is that after mid-2011 the AIM index fails to thrive. Instead of putting on consistent gains it keeps returning to the support line which it now threatens to fall below. This does not happen with the mainstream indices.

When I tried to reproduce this with my own data which has a survivorship bias however I get something different.

On this graph the magenta line is the mean return for "all" AIM stocks; white is the median return; and the red lines are the quantiles at 5%, 10%, 25%, 75%, 90%, 95%. (In fact this does not include all AIM stocks but is a random sample.) Apart from noticing the hilariously wide range of returns which need "E" notation on the graph (and a log scale) we see that with survivorship bias the median line is closer to the mainstream behaviour we saw in the Google graph.

It is easier to see on the AIM100 version of the plot which is slightly less wide ranging.

I conclude therefore, slightly unscientifically, that AIM index performance is pulled down by a large number of stocks which go to zero (some of which are out-and-out frauds). And it seems that since 2008, mortality rates in AIM have been high enough to prevent any real progress by the index. However, "good" AIM stocks have performed in a similar way to the main index but with wider swings due to their smaller size.

I leave it as an open question whether Stockopedia's ranks and other fundamental data can successfully find the "good" stocks within AIM - especially since frauds can often look like "value" stocks.

Nick

This is really interesting.

I was prompted to go back and re-read an FT article from June 2015, "Aim -- 20 years of a few winners and many losers".

https://next.ft.com/content/ea2bd724-140c-11e5-abd...

There's a passage which covers the ground you're surveying. The article is referring to research the FT commissioned from Elroy Dimson and Paul Marsh at London Business School.

Over the past 20 years, investors would have lost money in 72 per cent of all the companies ever to have listed on Aim, according to the professors, who were part of the team who designed the FTSE 100 index.

Analysing data on the 2,877 companies which have listed on Aim, they calculate that in more than 30 per cent of cases, shareholders lost at least 95 per cent of their investment.

By contrast, there are 39 companies — just 1.4 per cent of the historic total — that have given investors multiyear returns in excess of 1,000 per cent.

“While these have been superb performers, there have simply not been enough of them for Aim as a whole to generate a decent return for investors,” says Prof Dimson.

Marsh draws the conclusion that investing in AIM-listed companies is best left to professionals: private investors are the people "least equipped to sort the wheat from the chaff".

That isn't my conclusion, since with tools such as Stockopedia I think a private investor can do a pretty good job of excluding chaff.

Fraud, as you say, is a different matter. Paul Scott's obviously a good guide on that for specific companies and there was a request made on this board recently for him to put together a video to teach some of his skills in this department to others.

http://www.stockopedia.com/content/paul-red-flag-c...

(I haven't myself decided how to approach this issue. I ended up buying Lombard Risk Management (LON:LRM) a while back despite Paul's warning that the company was capitalising costs [which I don't mean to imply is actually fraudulent in a legal sense]. My "rationale" was that Lombard Risk Management (LON:LRM) was the company which my purely quantitative process spat out as the no.1 buy, so if I was following this process -- which I wanted to think I was -- I didn't have an option but to buy it. I regretted that pretty quickly, but I'm still keen on the idea of not second-guessing a quantitative process.)

The other question your post raises, which I don't begin to know the answer to, is whether a straightforward TA approach has any value for an index which aggregates massively dispersed price movements of constituent stocks. The seemingly obvious conclusion is that TA is not going to be worth as much as it is when applied to an index aggregating less dispersed price movements; but I'm not sure if that's right. Precisely because AIM constituents are massively diverse in price trajectories, and also because there's an awful lot of them, it might be that a chart of the index should be viewed as especially significant because it can produce signals where otherwise there is just a vast amount of noise. I dunno. I suppose another conclusion would be that one needs to construct a sub-index based on some basic quality criterion and do charting on the basis of that.

Novice Investor

TA in a market with large spreads, small market caps and low volumes doesn't seem ideal....

NI

It is not too difficult to filter out a vast amount of the AIM dross. For example, just view the Motive Television (LON:MTV) chart on a log scale over a couple of years and the value destruction is obvious. Frauds are harder to spot because often they seem to be generating cash (and of course it is possible to still make money if you get out in time.)

I suspect a strict rule not to invest in any company which is not making money will dramatically improve your chances of avoiding AIM disaster areas. It does of course cut you out from current "success" stories like OptiBiotix Health (LON:OPTI) or Tiziana Life Sciences (LON:TILS). If you trade these, or any of the small oil and gas explorers which used to rise about 75% after spud (doesn't seem to happen any more!) then you need to be aware that you are playing Jenga with your money rather than investing.

For some reason, all of the most discussed stocks on sites like LSE and ADVFN are utter rubbish - the worst of the worst. Since there are so many AIM stocks this is one area where Stockopedia can help a lot. If you only ever find out about stocks from BB discussions you are doomed before you start. But at least Stockopedia will alert you to the half-decent ones instead.

I agree that it is surprising that the AIM index even manages to make as much sense as it does given the nature of its constituents. But I was also surprised that the AIM100 (top 100 AIM companies by mcap) does not seem to perform any better than the AIM all-share index. So it would seem that size is not an indicator of stability on AIM. Although having said that I would definitely avoid anything smaller than about £50M and prefer >£100M most of the time.

FTSE AIM All-Share at long-term support

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Tomomo

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