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ÿReplies: 12032
Tuesday, Dec 7 1999 3:31PM ET
To: jaytee who wrote (12032)
From: David Lind
Jaytee, you asked a very complicated question, but I'll give it a shot.
Elder was the first to help me understand technical analysis in visualizing price movement and determining good entry points. Entry is everything, and IMHO, it is really the only thing that TA should be used for. I have not found TA useful in predicting future price movement and studies have indicated that it is not valuable in this regard. But it certainly does give a good picture of the current and past situation. That alone is very valuable in position trading.
What has worked best for me in terms of straight equity investing has been to first use basic fundamental analysis to define good companies that are likely to trend upward over the next year. Presently, the main source I use for helping to determine candidates is Briefing.com. A single search will bring up just about everything you would want to know about a company, and it is only $6.95 a month. I check recent news, and news running back about a year. So I get a good overall picture of the company. I want to know it is strong and well managed, and in a good sector that isn't likely to dump out of favor in the next few months. (You wouldn't want to buy an oil driller when the price of oil is dropping, or a drug company when congress is looking a legislation limiting Medicare payments!) Also important is the time of year. Many investors do not realize the importance of seasonal factors. November through May are nearly always strong months. If one did nothing more than buy in early November and sell in late January, one would beat most investors every year. May through October is dangerous. People take profits and things get crazy. I would be very careful about buying a short term call in May!
So again, the company, the sector and the time of year are important. Then I move to the charts to look at the long picture of the stock on the weeklies. If the trend lines are solidly moving up, even if there has been volitility, I will put the stock on my watch list. I will then check every few days to wait for a pullback. When I see one, I will again check recent news to be certain there is nothing really damaging. If not, then I will watch the daily charts to wait for the pullback to stabilize and the stock to begin to turn up again. Then I jump in. It takes a lot of courage to enter a position when a company has just taken a hit, but that is how money is made. It is nearly always on pullbacks in strong companies. To confirm this, one only needs to look at weekly charts of good companies. They pull back, then recover. It ain't brain surgery. IMHO, if one does nothing more than simply watch a handful of excellent companies and wait for a pullback before buying, one would do very well. The only trick here is not getting into the pullback too soon. One must wait for price to settle, then start back. Patience is important. Many people make the mistake of trying to find momentum companies, then buying into the momentum move up. That can be very dangerous, because a top can be made and the price can turn quickly. That's a game for daytraders, not for investors or position traders.
To summarize, I try to suggest to people that they simply (1) Identify strong companies in an overall uptrend, (2) Wait for a pullback that is based on a temporary situation such as news or one quarter of bad earnings, (3) Watch the daily charts to signal when price has bottomed, then jump in with courage.
Want a great example on charts? Check out IBM on a weekly chart. Strong uptrend, then it got wacked hard in late October. (Also a good example of what often happens in late October to many stocks.) If one had waited for price to level, then start a pull back, that would have been a great entry point at about 95. Also probably a very good point to set up a CC on a leap. Print out this chart and hold it up against any uptrending company, and you will often see the same pattern repeated over and over. Every few months they get wacked in a correction. Those are screaming buying opportunities, if one has the patience to wait for the correction, and the guts to step in when things are down.
Sorry about the long post, but nothing on this subject can be quickly summarized. I hope this is helpful.
- David |
