WEDNESDAY WEALTH RECAP
- Timing is everything… Alexander Green reminds us that no one is going to sell their stocks tomorrow because of last week’s inflation figures or jobs report.
- Nicholas Vardy shares how understanding the history of various golden ages helps you identify when and where the next ones are likely to occur.
- Wealthy Retirement contributor Jody Chudley explains how we can use big banks’ foolishness as a buy or sell indicator.
Editor’s Note: If you have stocks that are down 15%, 20%, 30% or more… you’re in the right place!
Today’s article comes from Chief Income Strategist Marc Lichtenfeld, who has found a way to 6X your money in just one month by harnessing tiny but potent “micro-bounces” in falling stocks.
And right now Marc’s holding a FREE training that he calls Project 9. In the Project 9 training, Marc will show you exactly how to use this “micro-bounce” chart pattern.
The training is entirely free. All you need to do is register to attend.
Simply enter your email address here and choose the date and time you’d like to take Marc’s exclusive Project 9 training.
– Nicole Labra, Senior Managing Editor
The letters and numbers were flying past me as traders shouted at me to execute their orders.
How were these guys making sense out of the seemingly random price action coming across their screens?
I was a newly minted assistant on the trading desk, and my job was to watch the markets, execute trades on behalf of traders and alert them to any trends that I saw.
The first two tasks were no problem. But I had a tough time seeing how those moving prices on my screen could be interpreted and lead to a decision to buy or sell stock.
I’d like to tell you that after a lot of studying and hard work, I finally got it. But I’d be lying. A year later, I was as clueless as I was on my first morning.
And then one day, a trader showed up on the desk with a new data source. When he hit “3” on the keyboard, the stock’s chart came up. He quickly toggled between a daily chart, an hourly chart and a five-minute chart.
I was enthralled. I peppered him with questions: “What does that mean? How do you know when to buy or sell?”
Without looking up from his charts, he snapped, “Go learn some technical analysis and then come back to me.”
Technical analysis? I had no idea what he was talking about. There was no Google back then. So I spent that weekend at the library devouring everything I could find on technical analysis – the study of stock charts (or charts of other financial instruments).
I enrolled in a class on technical analysis at a local university, and I was hooked.
All those random numbers I saw on my screens could be used to create a chart that would show patterns, trends and even price targets.
Importantly, I learned that those charts are visual representations of human emotion – greed and fear. And those emotions repeat in patterns and are somewhat predictable.
I became obsessed with improving my skills. I was fortunate that I had access to some of the most legendary technical analysts in the world. It was like discovering a love of baseball and speaking to Babe Ruth, Ted Williams and Ken Griffey Jr. every week.
At first, I thought I’d found a crystal ball that would lead me to riches. But what these legends taught me, and what my hours and hours of study showed me, is that charts are not foolproof.
But what they are very good at is revealing patterns and helping traders find the points of maximum reward and minimum risk.
For example, here’s a chart of Alibaba Group Holding (NYSE: BABA).
You can see that starting in late March 2020, the stock began to move higher. Let’s say that in June 2020, you were looking for a good entry point.
If you drew a trend line, which is a straight line connecting the lows of the stock, you’d see that it would be best to buy the stock when it came down to the trend line because, in the past, it had bounced off that area of support.
(Support is a price level where investors and traders come in and buy the stock, “supporting” it.)
In late June, you could have bought the stock at $240 and eventually would have made money. But if you waited until the stock came back down to its trend line, you would have done even better…
You’d have bought it at around $210 and ridden it higher for months, as the stock didn’t break the trend line until November 2020.
More importantly, you’d have lowered your risk.
When a stock breaks a trend line or other support, that is a sign that the psychology around the stock has changed.
For whatever reason, when the stock previously came down to the trend line, buyers jumped in. When it breaks the trend line, it’s a sign that buyers are no longer coming to the rescue.
We don’t necessarily know if it’s because the company’s earnings are down, the CEO was arrested or a new competitor emerged – and to be honest, we don’t care. We just know that the psychology of investors has changed, and we need to think about getting out.
Let’s say that in October 2020, you were once again interested in Alibaba. You could have bought it at $310 and then watched it fall all the way to $250, taking a sizable loss.
If you waited for the stock to come back down to the trend line, you’d have bought it at $270. Then the stock did in fact break the trend line, signaling that the uptrend that had been in effect since March was over. That was a sell signal, and you’d have gotten out with a small loss instead of a large one.
This is just a very simple example. There are many, many ways to use technical analysis.
Bottom line: Using charts and technical analysis increases the likelihood and size of your profits while decreasing the likelihood and size of your losses.
Twenty-three years ago, I was told, “Go learn some technical analysis.” I’m still studying it every day. I can’t imagine making a trade recommendation without it.