Thanks William. I did a study awhile back in an attempt to quantitate optimal entry points under oversold conditions. To measure the cumulative degree of downward movement I used a 3 day moving average of the daily low divided by the previous day's close (3ma). I then calculated the return which would have been obtained by purchasing a stock at a price expressed as a hypothetical low divided the previous night's close (L/PC) over a range of 3ma, and then by selling at the next day's close. So, in other words, I examined the proposition of buying into a daily drop in price under oversold conditions. For individual L/PC's over a range of .88-.97 at 1% intervals tested against individual values of 3ma's at 1% intervals I found, for example, that if one had purchased ASND during the 5/20/96-8/23/96 period, when the price was in a downtrend, each time the price dropped
8% off the previous nights close and when 3ma was less than .95, the cumulative return would have been 43% after deducting commissions. This was during a period when the stock went from 71.25 down to 38.25. I looked at lots of other factors and caveats, but this was the gist of it.
Traders know that when the price drops too much, too fast that it will bounce. No one knows when or how much, but they know it will. True now, true before modern derivatives were employed. I personally don't believe that significant manipulation is a part of it, but that's just my view. I attempt to view the market as an empiricist. There's something about an overvalued market, when speculation has gotten way out of hand, that deeply offends the sensiblities. In such a market certain human shortcomings, like glutony and stupidity for example, stand out. But to be honest, I'm not entirely above these foibles. I wouldn't mind making a fortune overnight. I think that at bottom though, after cutting through the moral revulsion, what really disturbs me is that I'm impatient to play, but the risk has gone up. That's really why I like to see the market drop. I'm in cash and I see a better chance when the prices come down. Really nothing moral about it. Good luck. |
