Avoid Logic
Stockscores.com Perspectives for the week ending November 10, 2006
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In this week's issue:
You would think that a rational, intelligent person would be good at predicting and trading the stock market. After all, stock prices are based on a company's ability to make money and it can't be that hard to determine who will make the most. Yet, so often, apparently good news is met with selling pressure, and bad news finds the interest of buyers. Some days, good news really is good news and is met with a favorable market response, but the same sort of news some time later will bring the opposite reaction by investors. If your personal pastime is trying to figure all that out and make money from it, well, you may soon believe that digging ditches is a more enjoyable profession.
Those who intend to pursue market profits need to straighten something out very early in their trading career; we can not try to figure out what the market should do, only react to what it is doing. What it is doing is what is always right, no matter how wrong it may seem.
The truth is, the market usually knows how it will react to news before the news comes out. The market predicts news, and does not react to it. When the expectation of news culminates in its announcement, the market has already forgotten about the freshly announced news and is now looking forward to the next important price moving catalyst.
There are two types of investors in the stock market. Those who look ahead to make their decisions, and those who look to the past. The former group is much smaller than the latter, yet it is comprised of the investors who make the most money.
Membership to the money making group of investors, those who look ahead to make their trade calls, can be achieved in one of two ways. The first is based on the privilege of being in the know, to be part of the inner circle of a company's information machine that will ultimately determine future price. The second is to be a member of the lower class information scavengers who simply try to figure out what the privileged investors are doing.
The stock market is not fair, there are some investors that have better information than the general public, and have a money making advantage when they can act upon it. However, those who learn to read what they are doing can achieve the same sort of market beating returns without really knowing what the inner circle knows.
There is actually an advantage to being a scavenger of private information. While it may seem to be more difficult to follow the smart money than it is to be the smart money, the truth is, the profit potential is even greater if you are a follower. Those with private information typically possess it only occasionally and on a specific company that they are close to. Scavengers can follow the smart money on any stock, and always be busy taking advantage of their advantage.
Abnormal trading activity is the greatest hint that an information scavenger can use to figure out what tomorrow holds for price movement. Stocks whose price changes abnormally, volume changes abnormally or whose price moves through important levels often do so because of significant fundamental change. The kind that is priced in to stocks before the news is announced.
The wisdom of an intelligent person would suggest that investment decisions should be made on what we know; the fundamentals of a company's business that has been recorded in the official record. If you want membership in the money making club, forget about taking this approach. The stock market is not fair, and it often makes no sense because most of us don't have the information to make sense of it. Unless you are part of the privileged group, you success will be based on your ability to figure out what the privileged are doing in anticipation of the future. Trust what the market tells you.
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In the Stockscores Daily Newsletter (for information, click here), I feature stocks when I see opportunities that I like. This week, in the Stockscores Live Trading Room, we discussed how waiting for pull backs on stocks I feature can be a good opportunity. The essence of the discussion was that waiting for pull backs on stocks after they make breakouts from good chart patterns can often improve the risk-reward ratio for the trade and improve the probability for profit.
There are two recent features that I have made in the Daily newsletter that I thought I would highlight this weekend because they are in the midst of pull backs. The idea is to enter the stocks on a sign that the pull back is over provided the stock has not fallen through support. Generally, we look for a green candle day (which means the stock closes above its open) as a signal that the pull back is done. Consider the two charts below;
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1. BRCM
BRCM made a breakout four days ago on good volume and has started to back track toward support at $29.20. If the stock has a green day on the chart, and provided it does not first close below $29.20, I think there will be a good opportunity to see the stock go higher. The next level of resistance is at about $40.
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2. V.YZC
V.YZC was also featured four days ago and it has been falling lower for the past three days. A green candle day would be a good signal that the pull back is over and the stock is more likely to go higher than lower. However, it is important that support at $0.28 is not broken first as that would be a negative signal for the stock.
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References
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Disclaimer
This is not an investment advisory, and should not be used to make
investment decisions. Information in Stockscores Perspectives is often
opinionated and should be considered for information purposes only. No
stock exchange anywhere has approved or disapproved of the information
contained herein. There is no express or implied solicitation to buy or
sell securities. The writers and editors of Perspectives may have positions
in the stocks discussed above and may trade in the stocks mentioned. Don't
consider buying or selling any stock without conducting your own due diligence.
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