In Part 1 of this series, I focused on the “self-search” step; where I challenged readers to take a few steps aimed at self assessing one’s affinity to risk taking. The first part of this series was based on the notion that self investing is NOT for everyone. Part II focused on a few extras. I shed some light on investing styles vis-à-vis time-frame (Traders vs. Investors) and the importance of knowing what category you fall under based on your natural leanings. In Part III, I will begin to focus on the process of selecting stocks and making that trade– Analysis.
Technical Analysis:
While I ‘m not a Chartered Financial Analyst (at least not yet) or a Certified Financial Adviser, I love investing / trading and I’ve been buying and selling stocks since 2003. Overtime, I have developed a very strong preference for Technical Analysis (over Fundamental Analysis). I will not invest time in this series to make a case for Technical Analysis but it is important to state my bias. It is also important to add that I apply fundamental knowledge and awareness of event risk to my Technical Analysis but the core of my buy / sell decision is based on the “Technicals”. At this stage, what’s important is to focus on methods and techniques that makes you most comfortable.
Technical Analysis involves (primarily) the use of historical price / volume information of a stock to predict future direction of stock price. In addition to past price history, it normally involves the use of charts, support , resistance or trend lines and several other technical indicators to come to a conclusion on the value of a stock and whether the stock is a “Buy”, “Sell” or “Hold”. Watch the video below just to get a high level view of market technical analysis; then take a moment, see what you can gather from it and then I will give another specific example / step-by-step breakdown of a sample analysis using support lines / bottom fishing technique.
Time to Buy: Technical Analysis using Support Lines / Bottom Fishing Technique:
The use of Bottom Fishing Technique demands knowledge of three basic technical terms:
1) Support
2) Resistance
3) 52 week high / Low.
Definitions:
Support: - A price or price range that has served as a floor or that appears to halt decline in the stock price over time. On a price chart, a support line / zone is visible. Prices will normally decline to the support zone and then, bounce i.e change direction higher. When support is broken, it reverses roles and normally serves as resistance.
The chart below is that of Dendreon Corporation with ticker symbol DNDN - one year scale (October 2009 – October 2010). I have drawn two green horizontal lines at the $35 and $30 share price points to help explain price support. In other words, the green lines are support lines. Let’s focus on the first line ($35.00), the star symbol indicates price reaching that line and then changing direction. As you can see on the chart, price touched the $35.00 support 7 times over the past year and changed directions. Six times out of the Seven that line acted as support; meaning prices stopped declining and changed direction upward right around $35. Take a moment and look at the grayish stars. Now support lines, once broken, become resistance (look at the one red star).
Resistance: - Resistance line / price zone is the opposite of support. It is a price / price range that appears to (often) halt an advance in stock price. On a chart, you’ll see that price advance to the said price (resistance price / zone) and usually pulls back. A resistance line acts like a price ceiling. Just like support lines / zones, once resistance lines are broken to the top side, they reverse roles and then become support lines for subsequent pullbacks.
The chart above of DNDN tells the resistance and role reversal story perfectly. Now focus on the second green line (at $30). From October 2009 to February of 2010, the $30.00 prize zone served as resistance. It halted price advance in DNDN 4times right at around $30 (see grayish triangles). In February of 2010, prices broke through resistance and the subsequent march 2010 pullback was halted at the old resistance now turned support zone (red triangle). Prices then advanced to the $57.00 zone and another deep August 2010 pullback was halted right around $30.00.
At this stage, it is safe to assume that Support and Resistance are now fully understood. Remember these are two of the three technical points we need to know while “bottom fishing”. The last is to know the 52week high and low price point.
52 Week High / Low: - The 52week high/ low as the names imply are the highest quoted price (high) or the lowest quoted price (low) of a stock during a 52 week period (1 year scale).
The 52week low is the primary search criterion used in the bottom fishing technique. It is significant because it is very common that a 52week low also represents a major support zone or provides a lower risk reference if there are multiple support zones. In the DNDN chart, we identified two important support zones over the past year (at $30 and $35). To make a trade or invest in DNDN, I can either place my buy entry at $35.00 or take a peek at the 52 week low (just above $25) and move my buy point down to the $30.00 region. This technique assumes that the closer your “buy point” to the 52week low, the lower your risk and the higher the profit potential. In other words, you want to “bottom fish” i.e close to the low (52 week). Some investors may choose to buy ½ of the position at $35 (the first support) and another ½ at $30 (the 2nd Support) for an average long position at $32.50. This is not a bad idea because if prices reverse at the 1st support, you won’t miss out on the trade.
Summary of Steps Using Bottom Fishing Technique:
- Search for Stocks trading at or a few points above its 52 week low.
- On 1 year (2 year , 5 year) Chart, look for support resistance lines
- With 52 week low identified, buy at support closest to the 52 week low
Bottom Fishing Yahoo Stock Screener Steps:
The specific search steps differ from software to software but using Yahoo screener (http://screener.finance.yahoo.com/newscreener.html), follow the steps in italics..
Click on the investment tab, screen tab, select search criteria, next select share performance, then extreme price parameters, 52 week lows.
You can specify how many points away from the 52 week low you want to capture. In the case, we will say $5.00 (so we are looking for stocks within $5.00 of the 52 week low). Now it will also be good to add another criterion – and this case, I will add “Share price” as a 2nd screening criterion. I want the screener to mine out stocks with prices above $20.00 (note that using the $5.00 , 52 week criterion without specifying a minimum share price, all stocks that are priced within $0.1 - $10 are within $5.00 of the 52 week low and will be listed).
Quote of the Day: Gratitude unlocks the fullness of life. It turns what we have into enough, and more. It turns denial into acceptance, chaos to order, confusion to clarity. It can turn a meal into a feast, a house into a home, a stranger into a friend. Gratitude makes sense of our past, brings peace for today, and creates a vision for tomorrow.- Melody Beattie
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