Technical analysts dominate the daily discussion of stocks. Fundamental concepts change slowly. Chart patterns change constantly. Usually the calls are dramatic, because no one cares about advice that says, “all is well, keep holding.”
Traders live on stock charts, but investors also pay close attention. Everyone wants to know whether a stock is breaking down, breaking out, or stuck in a trading range. Here is the key question:
How do you spot a good chart?
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More
We have several great charts this week. The Stock Exchange provides an expert-level debate on technical and fundamental analysis. (Important background is available here). Comments, dissent, and specific stock questions are welcome!
This Week—Is Felix right about KHC?
One issue with charts is the wide difference in interpretation. Do analysts see what they want to see? Are the interpretive criteria constant and objective? This week (without telling him) I searched for other opinions on one of our expert selections, Felix’s choice of KHC. The same principles would apply to all the picks, but this is a convenient example. Before turning to Felix, let’s look at other approaches.
This one provides a complex chart and plenty of additional points of interest. It makes a lot of specific predictions, suggesting many trades with moves of less than one point.
Here is another, one-year term and 50-day MA. This is a much longer time frame with an implied criterion reflecting that.
And a dramatically different time frame from the same source. Instead of a 50-day MA, we now have two hours.
And one more site, which invites predictions. I am not sure what conclusion you would reach, but the participants have many different conclusions.
The key point of this comparison is the widely differing images and viewpoints. The time frame matters, and so does added complexity.
Let’s see what Felix has to say, and also check out my own conclusion to this article.
I look for long-term themes, and I have a great one this week. I have a pick without an army: KHC. It is my lone soldier of the week, a strong company. The recent selloffs provide a good point of entry with the rebounds already underway. This should be good for another 5 points.
I’ve had a question this week from A Dash of Insight:
Question from Fred Barone:
Any opinion on CVI thank you
Felix: This is a stock I won’t be holding for a while; it has been going downhill since 2013. There hasn’t been much upside. On the other hand, it does rank in the top 25% of my universe, so it is not terrible. I would take a guess that you have been holding this for a while?
[F] Please keep your questions coming. I could use the overtime pay. And by the way, Jeff. Are we working next Thursday?
[J] Next Thursday the market is closed and we are all taking a day off to give thanks and spend time with family.
[F] I don’t have a family and I could use the overtime bonus.
I hope I’m not too late to the party on this one. Teck Resources Ltd (TCK) has been on a solid rise since March. We’ve had the stock price quadruple since then, which is remarkable to say the least. While I don’t expect to cash in on that kind of return in the next few weeks, there is still a tidy profit to be had here.
[J] This pick is not completely hopeless. The company has some earnings. There is plenty of fluctuation but excellent growth expectations. This might work.
[A] The market is sending a message that it will work. I listen, Jeff, and so should you!
While I focus on sectors, sometimes ideas get as narrow as a single country ETF. My regular sports channels had a brief blurb about some guy named Abe meeting with Trump. Some of my sources suggested that I should check out the WisdomTree Japan Hedged Equity ETF (DXJ) this week. Much like Japan’s national sport, sumo wrestling, this pick is all about momentum off the bottom.
[J] So you are telling us that you have been following the visit of Japanese Prime Minister Abe? The first foreign leader to meet with President-Elect Trump?
[O] Not exactly “following.” It was on my Facebook news feed.
[J] Why did you choose the Wisdom Tree ETF, which is adjusted for currency variation?
[J] Yen for each dollar.
[O] I’m not sure, but on my last visit, dollars were welcome.
This week I’m picking DXCM, DexCom a specialty health stock. After a sharp decline on November 1st, this stock has proceeded to consolidate and slowly climb back up from a low of 61.00. I will put in a stop at 62.50.I bought this stock at 70.96, looking for a nice rebound to low 80s or even higher. If we start to rally, I’ll be moving up my stop aggressively. My major concern is that move is based on perceived changes in medical policies from Washington, vs. improvement in the outlook of this company. I’ll be very tight on the trigger if the stock starts to drift lower day after day.
[J] Do you understand that his company has no earnings, no dividend, and no real prospects for the next two years?
[H] How have I been doing?
[J] Your picks have been profitable. I also like your frequent decisions to take profits and move on. You are not overstaying your welcome.
[H] That is a very honest. I like that in a human. Next you must learn to be more intuitive. Sometimes stocks rebound before the fundamentals confirm. I often spot such cases.
[J] Are you really considering policy changes from Washington?
[H] Of course not. The price and volume reflect that information!
Background on the Stock Exchange
Each week Felix and Oscar host a poker game for some of their friends. Since they are all traders they love to discuss their best current ideas before the game starts. They like to call this their “Stock Exchange.” (Check it out for more background). Their methods are excellent, as you know if you have been following the series. Since the time frames and risk profiles differ, so do the stock ideas. You get to be a fly on the wall from my report. I am the only human present, and the only one using any fundamental analysis.
The result? Several expert ideas each week from traders, and a brief comment on the fundamentals from the human investor. The models are named to make it easy to remember their trading personalities. Each week features a different expert or stock.
If you want an opinion about a specific stock or sector, even those we did not mention, just ask! Put questions in the comments. Address them to a specific expert if you wish. Each has a specialty. Who is your favorite? (You can choose me, although my feelings will not be hurt very much if you prefer one of the models).
My first job in the investment business involved a wide variety of research tasks. My boss, a clever fellow, became suspicious of conclusions from our technical analyst. He asked me to create some stock charts with the data inverted. He presented one group to our analyst, and got a verdict of bullish on all fronts. A bit later he presented the same charts, with the pattern inverted. As he suspected, those were also deemed to be bullish!
Technical analysis is interesting, but usually lacks rigorous testing. In today’s example, I do not know precisely why Felix likes KHC, but here are three ideas:
- The stock chart is like those I have seen before — descent from a prior high, a new base, and often an uptick.
- Some might see this as a “cup-and-handle” but not all such patterns qualify for Felix.]
- When we get a pick, it represents thousands of similar training cases, and hundreds of test cases. It is not just an idea with an argument, but a scientific conclusion.
You cannot identify a “good chart” unless you have many, many comparisons.