"An investment in knowledge pays the best interest." - Benjamin Franklin
If you were a meteorologist predicting the weather you'd be good in the markets. You would intuitively understand the investment process because of where it starts. If you can predict the weather, you can predict what comes next in the stock market.
You wouldn't expect the weather network to predict the weather by the number of wolves howling on a full moon. They have surely done some research and determined this isn't an indicator that works very well. But they do present some indicators on their website including a real time map displaying wind direction and cloud cover with existing precipitation. These are all indicators that don't just look good on a website page, they have been found to be highly reliable.
When it comes to the markets including thousands of stocks identifying what has been outperforming to date is the top ranked indicator for predicting the future. What comes next after relative performance?
Related: In the stock market, it's all about performance.
To be clear the trend is as important as relative performance. Some stocks might be doing better than nearly every other stock in the entire market, but if they're going lower owning them isn't helping the portfolio. But following the trend and relative performance as the top indicators, there are several indicators which combined provide a focused and insightful view into the market. Today we will focus on one of them.
In the stock market stocks may be categorized by condition. This might seem boring but it is very effective for putting detail into context. There are three broader conditions.
- Up trend.
- Down trend.
The first two are evident but stocks in bases is something that research has shown to be incredibly effective.
Bases, or price bases, are essentially a range. A base is defined by the high and a low that at some point is at least 20% below the high. A down trend is the first phase in a base as the stock needs to drop by 20% or more to qualify as basing. What is important to know is that once a stock is basing it is effectively damaged goods.
Clearly the market's best stocks eventually emerge from bases. But this is where investors get caught frequently suffering significant and unnecessary set backs. The desire to buy a stock when it is down seems to be a built in human drive. But even in the current hot market many stocks are suffering massive declines. What defines those stocks is they were almost universally immersed in bases. It wasn't that long ago that Netflix NFLX was highlighted for the purpose of showing why avoiding stocks in bases can pay off.
From our research and observation of investors, investing in the stock market without applying the science of bases is like driving your car blindfolded. Ouch!
What works in the process of predicting the weather works in the stock market, commodities, currencies and bond market. Focus analysis on the condition of a stock to empower the stock selection process.
What condition is this stock in?
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