- If you knew where the bottom of the market was, what would
you do? I mean, if you really knew for sure! You would pump all
the money you had into the market, right!
-
- So, if everyone knew then what would happen to the market? It would
skyrocket in no time. So, what is wrong with that? Here is a
hypothetical scenario.
- Suppose that you are the manager of a
mutual fund and you have millions of dollars that needs to be
converted to stocks, so at the end of the year, your performance
looks as good as possible. You want to keep your job don't you?
If the fund manager waits to buy until the market turns up then
they are chasing and paying more. But, the big problem is the
quantity of shares that they need to buy. It is better for them
to buy when others are anxious to sell, such as during the down
days before the bottom. This way they can accumulate the large
quantity of shares they need without pushing the prices way up.
When the major players have finally absorbed most of their stock,
the sellers have become exhausted. Even more bad news hitting
the market at this point will cause little selling, so now even
in the face of bad news the market begins to go up. The news
channels then begin looking for reasons to explain the rise in
the market, picking through the bad news for some minor good
news for a reasonable explanation. So, how is the public kept
from jumping in at the bottom?
-
- All this bad news you
hear is what makes you miss
the bottom and fearful to enter trades at the beginning of the
rally. The public is so distrustful of the market that they wait
until they are feeling secure about trading, which has them entering
trades right at the top of the rally. No matter who you are "missing
out" on a rally tugs at your emotions. The longer you watch
a rally, the more desire you have to buy. Isn't this right? Control
yourself and wait for a dip in prices or for a new low to form.
-
- So, how do you find the bottom? The first thing you do is avoid
the news and watch only the charts using technical analysis.
 You'll
notice in the chart that there was a clear indication of a change
in market direction. If you looked only at the chart and not
listened to any news of the war and all the other bad stuff,
you would have said to yourself, "there is a change in direction
after a nice strong move to the downside. If I buy some stocks
here and this is a false reversal, I will set my stop just below
the bottom of the previous day. If you did that at the first
purple line, you would have been stopped out and would have lost
some money, but at the next change in direction after a strong
downward move, you would have easily made back your small loss
and would still be in the green. Unfortunately, like most of
us, you were listening to the news and all the potential catastrophes
that could occur. Meanwhile, the big money is buying the stocks
you are afraid of holding on to and selling just before the rally.
After all, that's how they make the big money.
-
- The point is that the news distorts and corrupts the listeners
use of technical analysis. The news creates what ifs and subconscious
doubts that prevent you from entering trades at the best times.
Also, at market peaks, the news creates euphoria for a fearless
attitude to buy into the market at the worst possible time. Of
course I am talking about buying and holding, not daytrading.
Daytrading using the news can be profitable, but you must have
a real time news source that is reliable and you must be able
to decipher the news correctly. For example - The news is - "Intel
has lowered their processor pricing". Quickly, is the stock
going up or down? Answer - on just this fact, lower profit means
the stock price will be going down, but you also have to consider
whether it is an up or down day in the market, trend of Intel,
and a number of other factors. So, in my opinion, news is ok
for daytrading and bad for buy and hold. I suggest you use technical
analysis without the distortion of news.
-
- So, how did we locate the bottom on this weekly chart?
 We drew a "new
white trend line" to identify the actual trend. Notice how
the distance between the two lows has tightened up? This usually
tells us that the reversal will be a real one. The beginning
of a new rally. You can see that by breaking the trend line and
making a new high the market has begun a new direction in trend.
I anticipate a move to the downside and reversal creating a higher
low confirming the new trend direction.
-
- Don't get too excited yet. One chart of a weekly time period
cannot be used to make a firm market analysis. If you missed
the bottom, it's because you listen to the news. Use pure technical
analysis, Princeton style, to your advantage and stop listening
to the news!
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- Learning to trade is no simple task due to the skills and education
necessary. If you think that you've learned enough and are ready
to trade I hate to rain on your parade, but you are trying to
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reason people don't think they will get squashed in stock trading,
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professionals make a living. You know the old saying, "
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The first is to share my knowledge with fellow traders because
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