"A medley of extemporanea"

I remember at one of your Shindigs (yessss, those were GREAT!) you explained the action behind the charts; e.g., what was actually happening, what kind of buying/selling was going on. You made the charts come to life. Would it be possible to go over that again? Also, how can you tell that the base requires more work before it completes itself?

Hi, Sheila,

Unfortunately, I do not recall my comments at that long-ago Shindig. Nonetheless, chart action, to me, is more than mere x and y coordinates on a Cartesian plane; it is a living, breathing thing. As such, I am often agog with wonder. Perhaps I was successful at communicating this sense of wonder and excitement. My remarks to follow will likely develop as a meandering mess, but it will be my best attempt at communicating some of what I feel, see, and do in the markets.

I believe investment ideas, as opposed to opportunities (the first is internal, the second external), follow an almost natural progression; its direction might invert for some but the path remains the same. All investors progress from using solely fundamental or technical analysis to using both, and then finally allowing the market to create the specific opportunities to buy and sell. The problem for most investors is the inability to perceive the melismatic and syllabic textures of the chart (although they believe they do!), and instead repeatedly sing the same one note in the same key and tone. An organic, holistic approach includes both fundamental and technical analysis, as well as an appreciation of the aforementioned melismatic and syllabic textures. Do not forget that Cartesian space includes a z coordinate.

The sad truth is that most investors ‘practice’ technical analysis, but alas their perceptions are suspect, bad. I could count on the fingers of both hands the number of technical analysts who I respect because they understand chart action and can use it to know the shape of future bars. Most people who trade stocks think they offer some level of differential advantage over the returns generated by the market itself. Really, they trade intra-day volatility gussied up as analysis. Yawn.

My email inbox is inundated by a diluvian flood of requests to parse this chart please, that pattern, and "how about that stock over there…?” I do not mean to be rude, but if anyone knows the future, it is not me! My business is not to offer predictions... with the exception of those stocks and markets I already monitor. I track these because they represent low risk and compelling opportunity, and I know what to expect from a given and building setup or pattern; call it a prediction, if you prefer.

Not to demean fundamental analysis, which is important, but technical analysis is critical; it is better to be in the wrong stock at the right time than the right stock at the wrong time. My holy four: price, volume, pattern, and trend; the continuum, as I term it. To me, patterns build symmetrically and repetitively. If an investor learns these patterns, then he or she also learns what to expect. What compelled me, for example, to warn of the top in Apple/AAPL, admonish to buy on the turn up from the low trade 4 months ago, and repeatedly emphasize it as a “buy”, appropriate for the portfolios of all investors, irrespective of time frame. Yet readers ignored me. Another opportunity — a singular opportunity™— is Google/GOOG. I received today another emailed question re Google/GOOG…

What do you think? Is Google still basing…or is it hard to know at this point? I wanted to buy more but was waiting for it to go down again. Will I never learn?

One wondrous day does not equal a violation of the base, so yes, Google/GOOG remains in its base. At least until it trades above $318. But measure the short term oscillations against its long term potential. Unfortunately, the letter writer waits “for it to go down again.” Not to recount war stories, which I detest, but back in June amid all the hoopla I warned of the decline (which occurred) into a new intermediate term base, I indicated that base would be shallow (which it has been), and finally suggested the base would be brief, either three or six months in duration (so far, ~2 months). So why wait when Google/GOOG had declined to the top end of my projected range ($275-250), and subsequently reversed up? (In fact, I took care to isolate an upside reversal day that occurred on 18 August. This reversal is especially critical, if you recall the notion I have shared re the inability for stocks to achieve objectives…) Moreover, why wait for it to decline again? Arguably, you worry that the stock has risen from $275 to $310, and you missed an opportunity; but how high is its final high? If you believe that final high to be close to $300, then yes, perhaps you missed another opportunity. If, however, you believe that final high to be remote, then this bullish action is a shot over the bow, and the bells are ringing… The higher your objective, the more a 10% oscillation resembles nothing other than noise. Recall the Cartesian coordinates: price moves to an objective at some point in time. However, sometimes time moves to meet price. So remain flexible.

There are a million ways to skin the market cat. I, therefore, intend none of my comments that follow to indicate there is only one correct way. To each his own. Please do not interpret the comments as critical of another investor's methodology; they are only what work for me. Nonetheless, I…

• Do not traffic in options, nor do I trade futures. I monitor both closely, however, as my analysis of the futures and options markets is one building block of my market strategy. Albeit, not one that is foundational.
• Do not buy penny stocks. The misperception that occurs here revolves tightly on the assumed levels of assumed risk (yes, I intend the dual usage of “assumed”) and poor money management.
• Do not sell short.
• Do not impose arbitrary rules on a living thing. The stories I could share!

An investment for me can be measured in weeks and months; rarely does the holding period exceed six months. There are exceptions; the current exception is Google/GOOG, which I foresaw as a holding for many years. (So far, only one year has elapsed.) Therefore, I embrace the periods of dead money my Google/GOOG holding will sometimes represent. As Google/GOOG trades sideways in this base (and bases yet to occur), I continue to hold the position, while accumulating other stocks that emerge from their intermediate term base to provide the necessary thrust to maintain my portfolio's value in a constant upward trajectory. That is, Google/GOOG is one booster rocket I will not eject.

To provide an update, I will reveal alphabetically my current holdings: Altria/MO, Apple/AAPL, Cameco/CCJ, Coca-Cola/KO, Google/GOOG, Option Care/OPTN, Qualcomm/QCOM, Research in Motion/RIMM, and Whole Foods Markets/WFMI. I gaze fondly upon the following opportunities, awaiting the near completion of their bases and my imminent purchases: Dress Barn/DBRN, eBay/EBAY, Coach/COH, Starbucks/SBUX, and Yahoo/YHOO. (Thank you, ‘AP’!) Each of these opportunities provides a look at a different type of pattern with different rules; to perceive them as all of a piece means you continue to sing the same one note... The fact is, I purchase during the creation of an intermediate term base, and then sell at the excessive moments of the intermediate term uptrend. Anyone can achieve this; the availability of time to commit to the task changes only the periodicity in which you find your opportunities. The set-up and pattern remain the same.

Each investor can caterwaul to his or her heart’s content with predictions re market direction, or fret over this or that, and devote the time to learn… the wrong stuff. The right stuff, arguably, is to go about the business of creating and accumulating wealth; the market merely facilitates this endeavor. Leave behind with the hatcheck girl your pre-dispositions, pre-conceptions, surety, and ego. Let’s together go and make some money.

Any questions? (I know I did a piss-poor job of explaining this topic, so there must be many, many questions...!)