|Timing the Markets|
Timing the Markets
Please note that we have used historical data. These examples are for educational purposes only.
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 ChatFilter.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 StockTools to look for recently uptrending stocks I often do a simultaneous search based on the following signals & criteria:
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!
Putting ChartFilter into Context
ChartFilter is meant to complement your overall trading knowledge and decision-making. This newsletter focuses on applying technical analysis (TA) methods to various markets; but this is not to say that you shouldn't be considering important fundamental criteria, such as EPS or revenue, as well. Think of ChartFilter as your TA assistant; not as your overall trading strategist.