Do You Try to Agree with Yourself?
Stockscores.com Perspectives for the week ending February 21, 2017
In this week's issue:
In This Week's Issue:
- Stockscores' Market Minutes Video - Understanding Price Gaps
- Stockscores Trader Training - Do You Try to Agree With Yourself?
- Stock Features of the Week - Abnormal Breaks US
Stockscores Market Minutes - Understanding Price Gaps
Price gaps occur when there is a quick change in the market's perception of fundamental value. They have to be traded differently than normal price action because there is an increased potential for profit taking. This week, I discuss this, my regular weekly market analysis and the trade of the week on UN. Click Here to Watch
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Trader Training - Do You Try to Agree With Yourself?
Investors usually do some research on the stocks that they are considering purchasing. This might involve checking the company's financial position, reading their recent news releases or consulting research done by experts. The aim is to make a well informed decision.
If the research satisfies their criteria, a trade will be made. For most investors, that trade brings with it a dangerous commitment. Since no one likes the pain of suffering a financial loss in the market, the investor now has a vested interest in finding any information that they can to confirm that they have done the right thing.
Behavioral finance researchers call this confirmation bias. This is the tendency to seek out information to confirm their trading position and ignore or underweight anything that runs contrary to their financial interest. It is dangerous practice and one of the reasons why I think the small investor should not seek out any information at all when buying stocks. Instead, just learn how to interpret the market's message.
Let's say you buy a mining stock that has some gold projects that have good potential. Before you buy the stock, you read the company's news and some analysis done by a mining expert who publishes a newsletter. All indications from your analysis is that this stock is likely to go higher.
After you buy it, the stock does go higher, adding further credibility to the research work you have done. Then, one day, the stock makes a very abnormal move lower without any corresponding bad news. You go on to a stock market message board and find a few comments about initial results from the project rumored to be poor but most comments confirm what you know; the company has some great projects.
You ignore the naysayers and seek out other information that confirms that your stock is a good one to hold. You find enough good information to convince yourself that the market's recent downward move is an overreaction and wrong.
In doing so, you have behaved like a normal human being eager to avoid pain and pursue pleasure. Unfortunately, we humans are myopic and, in this case, you are likely avoiding short term pain but increasing the chance for long term pain. The market moved down for a reason and, if you wait to find out why, it is usually too late.
I believe that fundamental analysis is essential for the market to function and has to be done. However, it does not have to be done by you because you do not have the resources to do it well. Those who do it right will tell you what they know by their actions in the market. Just listen to them.
If you know too much about a company, you are likely to fall in love and commit the sin of confirmation bias. If you must seek out information, make sure you are balanced in how you do it.
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This week, I ran the Abnormal Breaks US Market Scan in search of stocks capturing investor interest. When that happens, stocks will trade with strong volume and make an abnormal price gain. The key is to find these when they are just breaking from a predictive pattern. I like to look at the daily and the weekly charts to see the patterns.
Here are a couple of stocks that I think have good potential to make longer term turnarounds:
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1. SIEN
SIEN made an abnormal gain today, taking it up through resistance at $9.50. It may stall at $10 but the longer term pattern is a good one. Support at $8.40.
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2. THRM
THRM made a strong break higher today from a rising bottom after breaking the long term downward trend line in December. The stock appears to be on the comeback trail. Support at $35.
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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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