Do You Know These 10 Things?
Stockscores.com Perspectives for the week ending September 18, 2010
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In this week's issue:
Experience has taught that the simple approach is usually the best, it seems to capture the essence of what is important. So, with that in mind, here is a list of the 10 simple things everyone should know about the stock market:
1. Price Trends Are Made of Moves and Counter Moves
A move occurs when the stock moves either up or down for a sustained period of time without a move in the opposite direction. A counter move is a price move in the opposite direction but with less intensity than the original move. Up trends join the bottoms of counter moves and downtrends form the tops of counter moves. Therefore, a trend is a series of upward moves, each followed by a short term downward counter move. The trend line is drawn across the lows of the counter moves, creating an upward sloping line.
2. Irrational Valuations Can Not Last Forever
Stock price is based on the present value of future earnings expectations. That means the company is worth what it can make in the future. The market's job is to figure out what a company can make in the future and discount that value back in to today's dollars and adjust for risk. When stock's price in earnings expectations that are far beyond the company's ability, the market is being irrational. Eventually, irrational behavior is corrected.
3. Irrational Behavior Can Last Longer Than Your Bank Account Can Afford
The market is efficient at pricing stocks but that does not mean it cannot make mistakes in the short term. Investor emotion can cause the market to pay too high a price or accept too low a price for a stock and may inspire some investors to trade against this emotion, citing irrational behavior. However, the market has been known to stay irrational for a very long time and in doing so, take the hard earned investment capital of those betting against it. The lesson: don't fight against the market, it is always right.
4. Rising Bottoms Mean the Buyers Are In Control
If you look at a stock chart and see that the lows of the counter moves over time are rising from left to right then the buyers are in control of the market. Your success in buying stocks will be higher when you wait for the buyers to take control.
5. Falling Tops Mean the Sellers Are In Control
If you look at a stock chart and see that the highs of the counter moves over time are falling from left to right then the sellers are in control of the market. Your success in shorting stocks will be higher when you wait for the sellers to take control.
6. Uptrends Start Slowly and End Quickly
Bull markets are founded in skepticism and take time to develop. The upward trend will steepen as more and more investors take a buying interest in a stock. Eventually, too many investors will buy the stock and send it to irrational price levels which may then sharply correct downward.
7. Downtrends Start Quickly and End Slowly
Downtrends tend to start when irrational buying pressure gives way to a correction and the stock falls sharply, very quickly. The intensity of the downward move tends to dissipate over time until the downward trend becomes flat.
8. Trend Reversals Take Time, Exiting a Stock Takes Seconds
Investors are often unwilling to own markets that are acting irrationally, citing the likelihood of a correction is near. While this is true it should always be remembered that exiting a trade takes mere seconds and can be automatically executed with a stop loss order. Trend reversals usually take a few days to begin.
9. Public Information is Useless
There is no free money in the stock market. Companies that announce significant changes in the fundamentals of their business will see their stock price move almost immediately to reflect that new information. Using information that is already well disseminated will only produce random results.
10. Abnormal Activity Indicates Something Out of the Ordinary is Happening
To beat the market requires you trade on information that is not already well disseminated. This can be achieved with in depth research or inside knowledge. Within every company there are some people with this kind of information and they act in the market, leaving a trail to follow. New information is often highlighted by abnormal trading activity
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The surging price of gold has given a lift to the junior mining market. That makes the Canadian market, particularly for the junior miners, a good place to look. This week, I ran the Stockscores Simple Market Scan on the Canadian market and found a couple of good looking stocks.Back To Top
1. T.WDO
T.WDO is breaking out of a pennant pattern with strong volume through much of the week. Support at $2.35.
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2. T.GBU
T.GBU was the Canadian market's top gainer on Friday as it breaks to the upside from a period of sideways trading. Volume is strong supporting the breakout but the intensity of the breakout means there is a good chance it will pull back before it moves higher. Support at $4.75 needs to hold.
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References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
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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