Timing
the Markets
The
true value of technical analysis is in
giving investors a dramatic edge in timing
the markets. Once you've determined the
overall direction of a specific stock
- up, down or sideways - I recommend trading
with the trend. Don't try
to pick bottoms or tops - at least not
as a regular habit. Once in a blue moon
you might hit the exact bottom or top.
but meanwhile you'll go hungry waiting...
If
you are looking to buy, a much better
approach is to catch a stock in a steady
zig-zag pattern leading upwards and then
use technical analysis to determine the
best times to buy and sell. If a stock
has hit bottom, and shows signs of an
established up trend, even better. There
are always stocks to be found that are
steadily trending upwards. even in bear
markets!
Here
are some wise words from Colin Alexander's
excellent book, The Streetsmart Guide
to Timing the Stock Market.
When
technical analysis and fundamental analysis
support the same conclusions, the results
are likely to be spectacular. However,
fundamental analysis on its own does
not necessarily lead to stocks where
the action is. A stock might look wonderful
on the basis of its fundamentals but
in the real world more people may want
to sell than buy it. So the stock goes
down, not up. On the other hand, when
there are strong technical buy signals,
it will likely be more rewarding to
buy a stock about which you know little
or nothing than to buy a blue chip with
poor price action.
You
can tell from technical analysis when
an individual stock, or the market generally,
is in an uptrend or a downtrend, or
when the trend is sideways and ambiguous.
Within that framework, the timing techniques
described in this book tell when the
balance of the evidence favors buying,
holding a stock, selling, selling short,
or doing nothing. In simple terms, that
means buying a stock already showing,
by going up, that it can continue to
move up, and vice versa when selling
or selling short in a bear market.
As
long as the technical indicators remain
favorable, you can let profits run for
a long time, occasionally for many years.
When the balance of technical evidence
turns against a stock, it is time to
bank a profit or prevent a loss from
getting bigger. Over the years it may
be appropriate to buy and sell a stock
several times. Since you can never tell
beforehand how far down a stock might
go once it starts going down, you must
also be prepared to sell as well as
buy. Even the greatest stock can fade
and, in extreme cases, go down to nothing.
You must avoid the tragedy of losing
your life savings in a major bear market.
Contrary
to what many people believe, timing
is not about picking exact market tops,
either in the market generally or for
an individual stock. That cannot be
done with acceptable consistency, and
there is no point in trying.
Extremely
good profits should come some of the
time, and you should avoid devastating
losses at any time. It is certain that
you will sometimes misinterpret signals.
Remarkably, you might think, you have
to be right less than 50 percent of
the time. When you are really right,
you may succeed in buying a stock that
goes up by ten times or more. That,
in essence, is the secret of timing.
Chart
patterns will provide you with your first,
and often best, clues to a stock offering
a good potential entry point. There are
many different strategies. Usually a trending
stock will move upwards in a channel formation.
Some people look for stocks that are bouncing
off the bottom of the channel; others
look for stocks that are surpassing previous
peaks and heading towards the top edge
of the channel. Personally, I prefer those
that surpass previous peaks. Try both
approaches, using paper trades at first,
to see which method works best for you.
A
stock screener, such as the one we've
developed at ChartFilter.com, which allows
you to search for stocks based on technical
buy and sell signals from a large number
of indicators makes life much easier.
When
I use ChartFilter to look for recently
uptrending stocks I often do a simultaneous
search based on the following signals
& criteria:
- MACD;
positive zero-line crossover in past
10 days.
- Price
Channel breakout in past 5 days.
- Average
volume > 150,000
MACD
is a trend-following indicator; so a positive
MACD signal usually indicates that a market
has begun to establish a trend. Price
Channels are based on new highs for the
past several weeks; a breakout confirms
that the trend is underway AND the stock
is surpassing recent highs. These are
both bullish signals. The high average
volume of greater than 150,000 restricts
the search to highly liquid stocks.
When
I performed this search recently I came
up with the following list of stocks,
sorted by volume:
Let's
take a look at the first stock on the
list: JDSU - NASDAQ.
Did
we see the bottom for JDSU in September?
No one really knows. We do know however,
that the trend has reversed for the moment
and a couple of reliable indicators are
telling us that the price is on the move
upwards. With good trade management skills
(i.e.; an objective exit-strategy) this
type of pattern should make many of us
some money.
Timing
is a lot like fishing. It's more art than
science. Sometimes you hook a big one.
Most of the time, though, you happily
take the medium sized ones and talk about
the huge one that got away. That's fine,
there's always another fish in the ocean.
Better to reel in the occasional good-sized
one, than to wait a lifetime to hook a
giant (market bottom) that never appears!
TIPS
& TECHNIQUES - Using this combination of
indicators
For
more detailed information see the ChartFilter
reports on using the various indicators,
such as Price Channels and MACD.
