Hi sandintoes,
It is wise to pay close attention to the 200 sma.
For most stocks, that is the starting point for making an extremely important judgement: is the stock in an uptrend, downtrend, or sideways trading range?
The following are probably true, but additional criteria are required to confirm:
1. A stock trading above its 200 sma is in an uptrend, particularly if the 200 sma is upsloping.
2. A stock trading below its 200 sma is in a downtrend, particularly if the 200 sma is downsloping.
Beyond that, it is helpful to ascertain the relationship of the 50 sma and 200 sma. If the 50 sma has crossed up through the 200 sma, that is a bull cross. If the 50 sma has crossed down throught the 200 sma, that is a bear cross.
The significance of the cross is that this generally is the final confirmation that the trend has changed.
The criteria I use to determine trend change is the following:
1. For a stock that has been trading below the 200 sma (i.e., in a downtrend), if it rallies through the 200 sma, that is the first step towards a potential trend change confirmation.
2. Next, I require that the stock reach a peak above the 200 sma, then correct back towards the 200 sma and successfully test support at or above the 200 sma.
3. Next, I require that the stock rally above the prior peak ("first thrust") above the 200 sma.
4. Next, on the subsequent pullback, the stock must successfully test support above the prior test of support (usually the 200 sma itself).
5. Now we have a higher high and a higher low above the 200 sma. The final confirmation is the bull cross.
When all five have occurred, in my book that confirms the trend change, and one can then start considering a long position in the stock.
For a trend reversal to the downside, exactly the same criteria are used, except everything is opposite.
Why is it important to me to determine what the long-term trend is? Two reasons:
1. Consider long positions in stocks that are in an uptrend
2. Consider short positions in stocks that are in a downtrend.
(there are exceptions, but these are pretty good rules of thumb)
There are other reasons I want to know about the long-term trend, and keep track of it. First, long-term trends are just that---LONG. They don't shift every other day just for the heck of it.
There are other reasons, too. Let's say you are long some stock. You are getting nervous because it is correcting. Let's say this stock conforms well historically to the 200 sma "line in the sand." And let's say the stock trades down to the 200 sma. Bells should be going off and red lights flashing. It is time to watch this thing very very closely. Many will exit if they see a breach of the 200 sma.
If you see a gap down on big volume with a close below the 200, that is the signal to most to get out and stay out (or begin considering short positions in the stock).
The reason is that a big gap down on professional volume usually makes a stock dead money for at least a year, and more often several years. Time to take your money elsewhere. That's what the pros have already done. You know... those guys whose talking heads keep telling you to "have a long time horizon... hold for the long-term.... stay the course" as if that were some kind of wise advice. Well, it isn't. There are exactly zero professional traders or institutional investors who adhere to that nonsense that is only intended to maintain a ready pool of designated bag-holders [retail traders/investors] who they can sell to, and who will help prop the stock up long enough for them to liquidate their entire position. But anyhow, in general, when the pros storm the exits, follow them. They know what they are doing.
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Here's some graphic examples of why:
Professional gap down in CSCO one year ago. CPR unsuccessful, now rigor mortis is setting in. CSCO doesn't need a cardiology consult anymore, it needs a Forest Lawn consult:
139.142.147.218
Professional gap down in KKD 10 months ago. KKD is way past char-broiled, it is a little charcoal briquet for another year more at least:
139.142.147.218
Exhaustion gap (professional selling to retail designated bag-holders) with a blow-off top 17 months ago in SCOX. Rest in peace, SCOX, been nice knowin' ya. Hope you enjoy your delisting and Chapter 7 (not Chapter 11).
139.142.147.218
Triple-top, a series of professional gaps down, a tsunami hits out of nowhere, and bye-bye MLNM:
139.142.147.218
Not to be outdone, CHIR has its own triple-top meltdown and swan-dives onto the pavement.... won't be getting up anytime soon:
139.142.147.218
MRK kissed a Mack truck 5 months ago, but note that the kiss of death for MRK was actually much earlier, when there was a bear cross about 18 months ago, causing MRK to lose 50% of its value. To get back to where it was 18 months ago will require almost a double from current levels. Now MRK hasn't even got the strength to get back to the bottom of the monster gap, much less challenge the tsunami of resistance above. Lotsa luck, MRK:
139.142.147.218
Professional gap down 17 months ago, and IACI becomes a train wreck:
139.142.147.218
Note also that the problem with downside is that it takes TWICE as much of a move in the stock to break even. So while BIIB lost 44% the other day, it will take an 82% rise from here just to get back to where you started last Friday. Even if times were good for BIIB and the future looked rosy, how long might that take? As of last Friday, BIIB gained only about 22% during the previous year, when the market was in an uptrend mostly. That's why professionals have such a hair trigger and will storm the exits at the first hint of trouble! It's certainly not because they're a nervous bunch---they trade billion dollar portfolios for a living after all! You can't do that if you're terrified all the time, but you CAN do that if you have a good quantitative handle on risk/reward, know how to manage risk, and know when to up the ante, when to hold 'em, and when to fold 'em.
Note also that professionals make most of their money on the short side. Looking through these charts I think you can see why. Short is just a better bet, that's all, provided you are hedged. Besides, fear is more powerful than greed, and they know it.
So what to do if you are a long-term shareholder of some stock, and a monster gap down slams into you from out of nowhere?
Well, eventually maybe the stock will bounce back if it is a good company. But the question before you is: do I really want to wait, given that might well take years? And given that my money can be used elsewhere during that time?
Personally, I think the best course is call it a loss and move on (but not necessarily right away! There might well be a dead cat bounce, as we saw with BIIB today, and it might last a while too). With BIIB and ELN on Monday and so many such stocks before them, that's the decision the professionals and institutions all made within about 3 nanoseconds of the announcement, and right or wrong, THEY determine the market by virtue of sheer size.
Or, in short: when elephants move, mice get trampled.
Being a mouse, my strategy is to figure out what the elephants are doing, and move accordingly. Why they might be moving is of zero concern to me, and a mouse is in no position to argue with an elephant anyway. I just want to avoid getting stomped, and hopefully draft off the momentum they (not you or me) create.
T |
