Paul,
I agree there are times when unusual market events will cause what should probably be considered a buying opportunity in an existing position. Cost averaging can be a very effective tool in certain instances, and it is something I do use when I feel it's the best way to improve my position. At the same time, I make every effort to avoid situations where I feel cost averaging may end up being necessary. The same is true for stops. I don't want to lose money, and I don't want to tie money up in losing positions for indefinite periods of time. If I find myself thinking, "Well, I'm probably early, but I can always average down later.", it usually means I'm about to place an order I shouldn't. If it's a company I really would like to own, that's the place where I feel it's time to pull up some charts and pick a target for an entry point. I also generally try to have some idea of where my exit point should be at the same time. It doesn't matter if the time frame is 10 minutes or 10 years, placing an order doesn't make sense to me if there's enough doubt in my mind that I'm already trying to figure out how fix it before I place the trade.
<<<tie that to your 1/10/3 post on INLD which has been in a general downtrend thusly:>>>
INLD is probably as good an example as any, but the pattern doesn't show up in a 1 year chart. Looking at the 5 year chart, support shows up just above a buck in September 2001. Buying at previously established support levels is usually a good percentage bet. In the case of INLD, if support holds, there's a potential double bottom forming. Also, the theory is the longer a pattern takes to form, the longer the duration of the resulting move. From a pure TA standpoint, INLD wouldn't technically be a buy unless it breaks out above resistance at $3.70. IMO, that's where TA breaks down, and FA takes over. There has to be some reason to believe the fundamentals do, or will, justify a higher price, and the hoped for break out move, but waiting for the buy signal based on TA leaves a lot of money on the table. Based on the chart, I'd probably want to see the stock in a position to crack resistance around 9 to 12 months out, that helps me focus my research and projections on near term events likely to move the stock. I think there's enough information available to suggest INLD is under valued and has a good chance of hitting their projections, but that doesn't mean they will, or that it's impossible for some unpredictable event to occur which would affect their results. At any rate, the 5 year chart shows where the previously established support level shows up. For the record, prior to 2001 the company did business as Micron Electronics under the ticker MUEI, so the first half of the chart is basically for a different company. It does show up as a nice example of what a falling knife can look like though. Once support broke just below $10, there was nothing to hold it up except a few rounds of short covering. Trying to cost average into that kind of chart is suicide.
finance.yahoo.com
You can fine tune it a little more using other indicators:
clearstation.etrade.com
The stochastic chart shows the stock in an extremely oversold condition about a week ago at the same time it was retesting 2 year support levels. The stochastic chart doesn't have the best track record for accurate buy and sell signals on INLD, but being oversold while testing support is usually a good sign support will hold. In the last week there have been a number of block trades in the 500K to 1M range which is also typical of a reversal along the bottom. Also, the stock does seem to like MACD signals which look pretty good right now.
Anyhow, I've probably already gone too far afield with TA stuff and didn't mean to create a paradox with the 52 week comment, which was a generalization. Two stocks I came very close to buying last year, WCOM and KM, I avoided strictly for technical reasons. I honestly didn't believe either one would go bankrupt, and they both looked terribly cheap for most of the trip down. At the same time, both stocks were in free fall, and slamming through multi year support levels without showing even a hint of slowing down.
I seem to recall reading someplace that Buffet would sometimes spend a year researching a company before placing an order to buy. I don't know if that's true or not, but I get the impression he tends to be fairly patient when it comes to what and when to buy.
Except for V shaped reversals, which happen maybe 10% of the time, and are next to impossible to predict, most stocks will form some kind of a bottoming pattern before they start to reverse. Even when a stock is dropping for no good reason, such as an institutional holder dumping a large position, there will still usually be a point where it's possible to recognize a let up in selling pressure, which is typically followed by a period where the stock tends to trade sideways as the market digests the extra inventory. I suppose if there's a point to any of this, it's that buying sharp drops on bad news is something day traders do when looking to scalp a 3% gain on a dead cat bounce. If a stock really is a good value, it will eventually stop dropping like a fat rock and become a good trade as well as a good value.
While I'm willing to concede that buying INLD near support, which also happens to be the 52 week low, probably could look the same as buying WCOM at any one of the successive 52 week lows, it's not the same kind of chart. Holding support is something I view as being a critical part of this particular trade though. If my assumption support would hold had turned out wrong, I'd be taking a real hard look at the possibility that I had a loser on my hands. So far it seems to be doing what I think it should, with the added bonus of seeing the large blocks crossing. Anyhow, hopefully that explains why I think there's a difference between a new low and the bottom, and maybe a little bit of why I think throwing some TA into the mix can help to tell the difference between the two. |
