Michael Kahn, a leading technician and columnist, provides the inspiration for this week’s Stock Exchange. In a recent post he take on a quest: Unmasking the Voodoo of Chart Reading.
This topic really hits home with our Stock Exchange Group. Since they cannot explain their methods in great detail, outsiders sometimes think of them as “black boxes” with mysterious decision criteria. In fact, their general methods are quite clear. Through this series, we share many of their specific decisions. When I review the output, I see it as suggestions from a group of wise friends.
Kahn emphasizes this point.
[Charts] do not tell us what will happen. They are meant to give us clues as to what to do.
Charts do not forecast the future. They suggest that it is time to take an action.
You don’t sell when the market is overbought. It may still be going up and will get more overbought. But you pay attention because if the market does start to succumb to supply, the indicator – whatever told you it was overbought – will back down by a certain amount.
This is a great attitude to take when employing your technical indicators. Let us try to take the voodoo out of our group’s current ideas!
Our last Stock Exchange considered how to trade a market with a lot of headline risk. If you missed it, please check back and catch up on this important topic.
Market Tech Take
We are adding a new feature this week – a technical market overview. We will feature our proprietary measure, MHI, the market health index. This is a specialized combination of breadth and strength in our proprietary universe. For contrast, we will include an alternative technical measure each week. We welcome suggestions. What is your own favorite indicator?
One popular indicator of strength is the percentage of stocks above the 50-day moving average. Stock charts provides an excellent way to follow this indicator.
Another good one is new highs versus new lows. This is based on our special universe. It is over a two-year period. I will improve the time scale for this feature.
The market health is our key indicator. Once again, it covers a two-year period. It is important since nearly every method experiences the worst drawdowns when MHI give a negative signal.
Comments are most welcome on this segment – a work in progress. Vince and I will provide more ideas about interpretation. Meanwhile, watch out for the red line crossing above the green one!
Let’s turn to this week’s ideas.
This Week—How to Take the Voodoo Out of Your Chart Reading
I’m just getting into Wynn Resorts (WYNN). I’ll admit this is an unusual pick for me. Since I could be in this position for as long as a year or two, buying on peak isn’t generally my style. For my holding period, it takes a significant move to trip my trigger.
I find a few things attractive here. For one, the 200-day moving average increased steadily in 2016 despite rapid price fluctuations. It’s since leveled off, and now the 50-day moving average is climbing. I feel I can count on reliable growth here despite some short-term swings.
J: Are you worried about the company’s sensitivity to revenues from Macau? Those fell 40% in 2016.
F: That was just the subsidiary. The Chinese love to gamble. Look to the long run.
J: At least you have a choice that has a reasonable valuation and solid earnings growth. There is even a dividend. Chuck Carnevale’s excellent research tool helps us generate this chart:
F: I am glad you like the earnings, but I am focused on the price. What is this rumor that Mr. Carnevale is taking your job?
J: We hope to have him as our guest expert next week. He has his own job. I am taking a long birthday weekend with Mrs. OldProf. What about questions from your fans.
F: I always appreciate reader questions. The extra work helps my pay.
J: Are you responding to every request?
F: I am making a list of top choices from the “reader universe.”
J: What if a reader request is not on the list?
F: Then I do not see it as an attractive long-term choice. I respond to email with more specific questions.
J: And where would that be?
F: ETF at NewArc dot com. At least until you give me my own personal email address!
In an unusual twist, I don’t have a new sector for this week. I generally try to hold three sectors for a period of 2-4 weeks each – which means I’m a fairly active trader. This week, however, I’m good with my current holdings. In lieu of a new selection, let’s review one of my favorite picks so far this year. The Aerospace and Defense sector (XAR) was very kind to me.
I recommended this one back at the beginning of February. As you can see, that pick enjoyed some steady growth until the end of the month. As I said, I generally exit around the 4 week mark at the latest, so it was easy to walk away with a nice chunk of change here.
J: Yes, we enjoyed booking some profits on that trade. What about your current holdings? I see some hotels and also Roadrunner’s AVGO idea in your account. Are you too caught up in your NCAA brackets to give us a fresh pick?
O: No way, but I really need North Carolina to lose.
J: Good luck with that. What about the reader questions?
O: Like Felix, I am emphasizing the top choices from the reader questions.
J: So they are not necessarily your own favorites?
O: No, but there is plenty of overlap.
(Commentary translated from various pecks, rapid movements and beeps).
Reader PN informs me that I can get better performance from RoadRunner if I improve the birdseed diet. She writes, based upon personal experience in Oklahoma, that the best food consists of “small mammals, lizards, and insects.” Birdseed is a last resort. RoadRunner beeped with approval as I read PN’s email.
RR: I’m right up there with Oscar in terms of time frame. I like to get out of any new position within 20 business days at the absolute maximum. Short term growth is imperative. For Broadcom (AVGO), that’s exactly what I expect.
RR: This year has been a steep climb upwards for AVGO, with only a few bumps in the road. To me, the current price point looks more like an investment opportunity than a peak.
J: Your method is to look for rising channels, buying at the bottom?
J: I can see that on the chart, but why not draw it for us?
RR: That is your job! I can’t draw.
J: Broadcom looks good on a fundamental basis as well. Here is the fundamental analysis, once again from Chuck Carnevale.
RR: Once again, I am interested only in a four-week trade.
J: It is always better to trade stocks where the fundamentals are solid.
RR: Beep beep.
On occasion, I’ve been known to buy once a stock has already jumped. With Consol Energy (CNX), I’m confident that I’ll be jumping in early enough to come away with