One Step Ahead
Stockscores.com Perspectives for the week ending August 17, 2007
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In this week's issue:
Good traders are able to anticipate what the crowd is going to do next. In a sharp market sell off, the smart traders anticipate the bounce. On the bounce, the smart trader anticipates the resumption of the downward trend. The best opportunities come when the crowd makes the wrong move in the short term, providing an opportunity for the trader who can look down the road.
Most investors are notorious for being too myopic. Their trading decisions are driven by headlines and they often make bad decisions for the long term because they are too short sighted. What does the average person want to do when the newspapers cry "Investors Crushed by 400 Point Sell Off" with the obligatory picture of a floor trader wiping away a tear with his silk tie?
They sell.
And of course, that is when the crowd of normal people gets it wrong. The market bounces back, leaving most investors with seller's remorse. The same investor buys back their stocks at higher prices after a few days of upward movement. The headlines now trumpet "Market Stages Dramatic Comeback to Finish Up 250 Points!!!" with a photo of the previously disheartened floor trader shaking the hand of the politician whose save the day speech is credited with the reversal.
The next day, the selling continues and so too the train wreck seemingly driven by the maniacal Dr. Evil. But, how do you get off the train?
The same way a great chess player takes the King. The same way a great football coach rallies his players to win the championship. The same way a great artist paints a broad Fresco in perfect proportions.
To be a great trader, you have to think ahead.
There is an art to thinking ahead that requires avoiding the typical emotional reactions to fear and greed. Here are the steps you must take to think ahead:
1. Understand what the crowd is doing right now - this is simply identifying whether the crowd is buying or selling with aggression.
2. Decide whether the crowd is making a mistake - in an upward trend, this means selling below the upward trend line or buying too far above the upward trend line. In a downward trend, this means selling too far below the downward trend line or buying above the downward trend line.
3. Understand the signs of a change in crowd behavior - bounces off a trend line, running too far away from the trend line or breaking a trend line are good signs to watch for.
4. Look for those signs
5. Act
If a stock is moving down right now, then the crowd is selling with aggression. If the stock has been in a longer term up trend for some time and the stock is selling off close to the upward trend line then it is likely that the crowd is making a mistake. The stock will likely bounce off of the upward trend line, making it important to look for buyer strength around the trend line. This can come in many forms including strengthening bids, moving above the open of the day or making a break of the shorter term downward trend line. With the confirmation of a reversal, it is time to act before the crowd changes its mind.
Simple right?
Not really. It takes a good deal of time and practice to get it right. The most important thing to keep in mind is that the best opportunities come at extremes. There is a greater chance of an error, and an overdue reversal, when the market runs dramatically away from its trend line
Your best compass is your own heart. If you feel fear or greed then look to the stock chart to see if the crowd feels the same way as you. If so, think about what would cause you to change your emotions. If you can beat the crowd to that change, then you can make money.Back To Top
The market sell off over the past couple of weeks has taken a lot of value out of a lot of people's portfolios, but not everything has suffered. When the market is punished like this I like to look to see what escaped relatively unscathed and still has a good chart. When the market stabilizes, I expect these relatively strong stocks to do well.
This week, I did a simple market scan that looked for stocks that had a Sentiment Stockscore of 70 or higher and had traded at least 5000 times on Friday. This gave me about 60 stocks that still had decent charts and were quite liquid. Here are two stocks that I thought stood out:
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1. CSCO
CSCO broke out of a long term cup an handle pattern about six weeks ago but its upward momentum was stalled when the market broke down. The stock has now pulled back to its upward trend line and looks like it will bounce and continue with its early stage up trend. Support at $28.50.
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2. PAYX
PAYX broke to multiyear highs two weeks ago but pulled back over the last 10 days. It now looks to be bouncing off of its upward trend line and likely to go higher in the weeks to come. Support at $40.95.
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References
Get the Stockscore on any of over 20,000 North American stocks.
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Strategies that can help you find new opportunities.
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Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.
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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