Hi Reid,
Thanks, I agree with you, particularly in your long-term assessment of the $COMPX.
As you point out, stock and market movements rarely approximate straight lines, and most often approximate sawtooth-like patterns, whether generally up or generally down. These work out in all time frames, as can be readily seen by shifting from intraday charts with 1 min to 60 min candles and everything in between, to daily charts with time frames from 1 month to several years. To me, these are caused by shifts in investor sentiment from greed/bullishness to fear/bearishness, and these also wax and wane in reaction to stock prices. And, there are very short-term cycles in these, as well as macro trends playing out over a time span sometimes of years.
Measures of investor sentiment can in some cases be fairly reliable predictors of subsequent stock price movement and are really just another technical indicator, but just not directly derived from price and volume and time. The reason I think this can be valuable is that it adds a technical indicator which is relatively independent of the other indicators, which tend to be very interdependent, since they are all based in some way largely on the same thing (price and volume and time, or some derivation thereof). And so, for example, it is rare, if not impossible, to see OBV indicating extreme oversold conditions, and hooking downward, while the Williams %R is indicating extremely overbought conditions, and rising sharply. Technicals tend to more or less agree with one another, but can turn on a dime and move the opposite way with little or no warning. I don't need to tell you that this doesn't at all mean they are saying exactly the same thing, however, and I'm not implying that they are not useful---of course they are. But sentiment indicators can sometimes provide an indication of an impending shift in trend which is not yet reflected in the technicals or chart, particularly as these sentiment indicators approach relative extremes and are discordant with fundamentals and/or the chart and technicals.
So I view sentiment indicators to be an adjunct to technical and chart indicators, just another piece of evidence to add in putting together the puzzle of where a stock price is likely to move next, and how much confidence can be placed in that judgement. I would consider it very unwise to invest solely on the basis of sentiment indicators alone.
I've been reluctant (read: fear) to take long positions in downtrending stocks, and short positions in uptrending stocks. Perhaps this has been a mistake, as you imply, and perhaps I have been overly concerned with the underlying trends vis-a-vis the moving averages. As you point out, stocks and markets move in sawtooth fashion, and profits can be made trading these both ways regardless of the underlying trend. We both pay very close attention to these, and we are of course attracted to stocks which show clear sawtooth patterns with high probabilities and high volatilities, as these render the technical and chart indicators more reliable [such as our dicussion of MCDT recently vis-a-vis Bollinger bands, and wide swings from overbought to oversold which coincided nicely with stochastic and Williams indicators]. But they also tend to render the sentiment indicators more reliable as well.
And trends in more macro cycles---for example, Fed lending policy, inflation, growth, and so on---tend to be harbingers of shifts in investor sentiment and stock and index price movements. When discordances among these become marked, these discordances become increasingly significant.
That said, I think it undeniable that moving averages can and do present price movements with strong support and resistance, and should therefore not be ignored.
You may be interested in a book recently published, written by Oliver Velez and Greg Capra:
amazon.com
Besides going into the tools of the trade, and investor psychology, their techniques are entirely and fairly simply based upon sawtooth-like price movements, which determine entry and exit points and stops, as well as the relationship of stock price and direction to moving averages and their direction.
Another very well-written book that I think is very unique, at least to me, is by Bernie Schaeffer, and concentrates largely on investor sentiment indicators:
amazon.com
I've resolved to re-read these and other things myself, since this year has completely convinced me of three things: 1) I have a lot to learn; 2) I would benefit by incorporating far more discipline into my trading; 3) I would benefit by much more rigorous risk managment and capital preservation techniques.
JMVHO................
Terry
P.S. I realize much or all of the above is hardly news to you, but was written largely for the benefit of others on this thread, including lurkers. |
