When buying and selling stocks, if you don't know the answer to "how do I know" then what are you doing? - Paul Thornton, Investor Boot Camp
Why a stock's condition matters
Making distinctions matters in just about everything including the buying and selling of stocks and E.T.F.s. But without a context investors may struggle with the fine tuning aspects coming from market analysis.
At Investor Boot Camp we empower investors to develop an intuitive sense of how the markets work especially the stock market. Then we work on a process of market analysis that is both effective and efficient. There's a lot to this so let's start with how to know what condition a stock is in.
Think of a stock as being in one of three conditions:
- Down trend,
- Range bound.
That might seem simple enough but our discussion with investors reveals there is confusion particularly on market behaviours associated with rangebound action. Let's look at what that is and why it matters.
Using the visuals below let's look at these three conditions. In the first one, an uptrend is evident as the stock works its way higher over the one year period shown in the price trend. AMD has been one of the top ranked leading stocks from our research despite its small company lower priced stock profile (higher risk).
In the second chart below a down trend is as evident as the uptrend from the first chart. The time period is longer but that doesn't change the conclusion from the analysis. At some point at the beginning of a new trend good timely analysis draws a conclusion that the trend is underway with implications for decision making as it relates to an investment portfolio.
Notice also that in any established trend there are ups and downs within the context of the trend. They can be relatively severe on a short term basis but it doesn't change the underlying trend.
Now we move into the interpretation of a range bound condition. You can see it highlighted by the red box in the third chart below called Range bound (basing) stock.
A range consists of three elements. The down trend that starts it, a bottoming out period (which doesn't always occur) and the recovery phase. In the stock shown all three are present. Notice how long the down trend and up trend phase are. Another distinction is the range within the longer term range (base) from May 2016 to October 2016. This range is part of the longer term base.
Until a stock clears the base it has not established an up trend.
The basing process can have any kind of appearance or path as the stock works its way through each of the three phases. The reason this matters is because bases are highly unpredictable and unfortunately very challenging for making a profit in. To assume that one can enter the stock as it comes off the bottom and make a profit has been proven to be highly speculative.
By reviewing many bases investors can see why profiting from buying stocks in bases is elusive. As it turns out, the thousands of choices available in the stock market give investors something more reliable. Buying and holding stocks that are in bases.
If one group of stocks has cleared their bases, thereby entering up trends, they are by definition ahead of all other stocks still immersed in their respective bases.
Why the basing process is one of the most significant pieces of knowledge for stock investors
It is our view that operating without a good working knowledge of bases is like driving a car blindfolded. The problem is many investors don't recognize this because they are completely unaware of the basing process and the alternative and more reliable strategies in picking stocks.
Now you practice by looking at billions of market behaviours with an eye to making a distinction between stocks in bases and stocks in up trends.
What it isn't matters too!
Notice how interpretation has nothing to do with who the President of the United States is or who will win the Super Bowl. It's about the market itself where buyers and sellers have come together to execute buys and sells. Whatever their reasons for their buys and sells, that's their business. What we care about is the affect it has on the price of the stock or E.T.F. That's where timing comes into play. Just ask anybody who bought into falling 3D printer stocks like SSYS after the peak (second chart below).
Range bound (basing) stock
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