Focus on Price
Stockscores.com Perspectives for the week ending May 9, 2011
In this week's issue:
Go back to your roots. Remember when you first started trading the stock market? Back then, all that mattered to you was price. Perhaps it was out of ignorance, perhaps it was because you were only concerned with making money, but in the beginning, you probaby did not look much beyond what the price of your investments were. Subtract the price you paid and you could quickly figure out whether you were making or losing money. Price was all that mattered.
Since then, whether it has been a few months or tens of years, you have likely muddied the waters. With an appetite for finding the holy grail of trading success, you have added many tools to your investment toolbox. The PE ratio, MACD, RSI, OBV and TRIN may have satisfied your hunger with an alphabet soup. But are you satisfied?
So many traders seek to solve their inability to consistently profit in the stock market by making the analysis more complex. In doing so, they miss the point. All that really matters is price.
Stocks do not go up because the MACD signal line crosses up, they do not make a bottom because the RSI hits oversold levels. I have never known a stock price to move lower because of a violation of the 200 day moving average. While many traders will use these signals to make decisions, we must still remember that stock price changes for very simple reasons.
Stocks go up because people are willing to pay more. Stocks go down because people are willing to sell for less.
While there are many factors that affect how investors make their decisions, the one constant in the market is that people are making decisions. To be successful in the stock market, you have to understand how people think. We are not computers. Instead, we have emotions that make us do stupid things. The trader who understands human psychology is the one most likely to beat the stock market.
What causes us to buy an Ab Roller advertised on the TV while we lie on the sofa eating Doritos at 2:00am? What makes us put bars on our basement windows while we have a decorative glass door on the back of our house? Why do we carry a balance on our credit card when we have money in our savings account? Why do we buy lottery tickets when the return on our investment is negative?
Mr Spock would have found great humor in human behavior if he had the ability to laugh but, alas, he was not burdened with emotion. He was probably not great at parties, but he certainly could have made a good trader.
If you are investing in stocks, always remember that all that matters is price. If you buy a stock and it is priced lower than what you paid, you are losing. When analyzing a stock, the price patterns will tell you more about the future direction of the market than any indicator. When determining the sell point of a stock you own, keep in mind that the good feeling of a locking in a profit is not a good reason to exit. Don't ignore a negative price pattern because trading volume is light. If price is telling you something, listen. Price is your master.
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The market went through a tumultuous week as sellers found a reason to take profits, mostly because the US Dollar found strength after the European Union opted not to raise interest rates. While the selling pressure was relatively swift and likely brought out some fear among investors, it did not cause a breakdown in the long term bull market. The selling this week took emotion out of the market, but did not yet change the mood.
It did however mean that there are relatively few trading opportunities this week, I have found one stock that is worth considering.
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1. AVGO
AVGO had a good move to the upside on Friday on strong volume, breaking it out of a pennant pattern. The stock looks likely to continue its upward trend, support at $31.90.
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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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