Tuesday, December 18, 2012

Technical Knockout

In spring of 2012, based on all my fundamental analysis, I selected some healthy, dividend-paying companies and REITs and sat back to watch my money grow.  And lo, it worked!  For about one month.  Then, the prices of my well-selected stocks began to drift down.  I watched as my paper profits dwindled and then my paper losses began mountain as the prices drifted down... and down... and down.  At first, I thought, well, it's not really what's happening to my oh-so-healthy stocks, it's just that the stock market itself is having a few down days.  It will recover, and so will my stock prices.

But of course, that's not what happened.  What actually had happened was that I experienced (without knowing what it was) my first trend reversal.  One of the things I had looked at before I purchased a stock was the direction of the price movement.  All of the stocks I'd chosen had prices that were neatly trending upward.  REITs, especially, were “unstoppable” at that time.  That was a much better sign than the downward drift of my earlier, poor decisions. Stock prices never (or rarely) go consistently up and up and up every day... they "correct", and sometimes go slightly down before continuing their upward trend, so I wasn’t concerned when it happened.  

In the summer of 2012, when my stocks had some down days, I knew that the stock market as a whole was also having some down days so I failed to take notice of what was really happening.  Many of my stocks were actually experiencing a trend reversal, in which the upward trend switches to a downward trend (or vice versa).  Because they all had some "up" days (stocks "correct" on their way down as well as on their way up), I didn't notice the trend, and frankly, didn't know what to look for.  I stood by the decisions I'd made on what stocks to invest in and held on. And watched, dejectedly, as my nice plump stocks drifted down... and down... and down.

But how did I go SO wrong on that?  Of course I realized (after the fact) that although my stocks were trending upward when I bought them, I needed to watch out for them to top out and reverse direction.   How could I be so foolish and naive?

Clearly, the trend was not my friend.  The trend and I were just barely acquaintances, and I’m pretty sure the trend thought I was an arrogant newb who thought she knew all she needed, and everything was going to be easy.  That is really not a good way to befriend the trend.

The flip side of fundamental analysis is known as technical analysis and it involves identifying price trends and being sure to use the trend to your advantage. Buying low, and selling high, as it were.  I had been aware of technical analysis from reading the Dummies books, and I had glommed on to some of the concepts, especially moving averages, so I knew to look for stock prices trending upward.  I had made some great choices of companies and REITs, and bought when they were trending upward, but I'd failed to notice when their prices topped out and reversed into a downward “bearish” price trend.  

Realizing that because my chosen stocks were healthy, I had a better chance of winning the trend back as my friend, and in the meantime I was enjoying a healthy yield from each of my stocks, this time I held on to them.  I watched them drift down... and down... and down... but by late 2012 they have reversed again and are mostly trending upward.  I still have some paper losses on them, but the paper losses are dwindling as the stock prices trend upward, and I'm hopeful that they'll recover at least to the level where I bought them.

I am now intently studying technical analysis.  I don’t want the trend to just be my friend… I want the trend to be my BEST friend.  When the trend has a bad day at work, or the trend’s mom gets sick, I want to be the one that the trend calls for support.  I am starting by actually paying attention to the trend instead of ignoring what it is trying to tell me.  I’ll watch what the trend is doing on the S&P TSX index, as well as on my individual stocks.  I just need to learn to speak the trend’s language a little better than I do now.  I am fairly comfortable with moving averages, but I have a long way to go… I’m delving into the voodoo-land of Bollinger Bands and indicators such as MACD, Relative Strength, and On Balance Volume. 

My friend, Meghan, recently asked me if the reason I’ve become so interested in the stock market is because I had some early, addictive successes.  I hadn’t thought of it in those terms before, but as soon as she asked me that, I realized that no… quite the opposite.  I have become so interested in the stock market because of my early FAILURES and wanting… needing… to figure out what I had done wrong.  I enjoy mental challenges, and I prefer things that take some time and effort to figure out (thus the 21-year career in IT).  The stock market is huge and complicated and price movements are chaos-driven, but there are those who say you can use that chaos to your financial advantage, and I really want to figure out how to do that.  I’m hoping that this was my last “KO”, and the main thing I’m concerned about is that I may learn the technical indicators very well but still miss a big “crash” when it happens.  I’ve read that if people had paid proper attention to the technicals, they would have pulled out of the market before the big crash related to the dot-com bubble. 

Hark… is that some ominous cliff-hanger music I hear?

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