Becoming the Path

A reader writes...

Regarding JWN: I'm trying to learn about price action, notwithstanding all the other factors one should consider in an investment decision -- no analysis paralysis here but I wonder if you'd comment. The upside breakout hasn't occured yet, as I observe a consolidation rectangle happening since ~Aug 05. I see this in many time frames. To confirm the upside breakout we'd want to see a solid close above $38.50. Even then it'll likely retrace before going up to our first upside objective which would be ~$47 ($39 + 8pts, the depth of the rectangle, = $47). My question is this: what do you see? If the breakout is not confirmed yet, why do you buy? Are you seeing shorter time frame pattern(s) that confirm a good entry point, or are you looking at a longer time frame and see something else?

[click to enlarge]

My earlier, private reply sucks...
You are so close to the trees you can see the gnarls in the bark — but not the forest. Shift periodicities. I think I will try again...

I have previously denoted my critical four items when parsing a chart: price, volume, pattern, and trend. I note in the chart of JWN, for example, that
1) The share price is very near its all time high (itself set ~3-4 weeks ago), that
2) The price:volume relationship remains fine across individual bars and the epochal pattern the writer delimits, that
3) The pattern offers every indication of being a base -- in fact, it is a short term (the past 3-4 weeks) base above an intermediate term base (the one notet) -- and not a top, and that
4) It remains within the boundaries of a long term up trend.

There comes that moment where you must trust the truth of the pattern, the trend -- and yourself. I return to this 'old' post, and ponder in particular these two insights that resonate for me, and arguably are applicable to this 'conversation'...

"Experts perceive patterns in their domain. Bill Chase and Herb Simon demonstrated this point with chess players. Rather than focusing on the position of individual pieces, expert chess players perceive clusters of pieces, or chunks. Estimates suggest that chess masters store roughly 50,000 chunks in long-term memory. Notably, this pattern recognition does not represent superior perception ability. When chess pieces are placed randomly on the board, experts remember the positions about as well as novices. The difference amounts to a database of chunks, amassed through deliberate practice, from which experts can draw." (Emphasis mine -- dmg)

and...

"Experts spend a lot of time solving problems qualitatively. When researchers present novices with a problem within a domain, the novices quickly go to relevant equations and solve for the unknown. In contrast, experts tend to create a mental representation of the problem, try to infer relations within the problem, and consider constraints that might reduce the search space. Domain knowledge and experience allow experts greater perspective on problem solving." (Emphasis mine -- dmg)

I have looked at so many charts and for so many years that I know how a pattern -- in truth,, many patterns -- fulfill themselves; i.e., complete the setup. For example, how many breakouts does the investor require ("The upside breakout hasn't occured yet") to know, to see, that the long term trend is up, as is the case for JWN? Breakouts occur from a pattern but within a trend; the continuum (more or less), as I term it.

Approximately 4-6 weeks ago, I recommended Dress Barn/DBRN, then at $25. It required the sudden lurch upwards to $35 before igniting the buying interest of most readers. Why should that be? I suspect it is because most investors draw a line of demarcation into the future from the moment they first notice or come upon an opportunity; their attention drawn to Dress Barn/DBRN at $25, they now see they gave up an easy and quick 40% gain. "Is it still okay to buy?", they wonder. To which I ask, "Why is it okay to buy at $35 and not $25...?"

Try this parallax view: select an opportunity that especially excites you, look at its pattern, step into the future, and look backwards in time from the moment in the future to today. Draw the line of demarcation from the future high rather than from the wholly arbitrary point that you stumbled upon the opportunity. You say you cannot do that, see the future? Then develop a repository of patterns and trends so that you know how they tend to fulfill and complete themselves. Cluster the information, the patterns, and the spatial contexts. From the same afore-mentioned research report ("Are you an expert?")...

• Successful investors put in plenty of deliberate practice. In investing, this generally means lots of time reading, often across diverse fields.
• Great investors conceptualize problems differently than other investors. As a group, these experts go beyond the near-term obvious issues, can identify relevant principles because of their experience, and see meaningful trends.
• Not pattern recognition but process recognition.

That is, the continuum. It is no different across the many opportunities I bring forth: JWN is no different than DBRN, or AAPL, CAKE, COH, DNA, GOOG, HOLX, MATR, NKE, NUVA, SBUX, SIRF, TEVA, TRID, WFMI... (I really, really must write a post updating my portfolio opportunities!) The patterns and setups might be dissimilar, but the trends remain the same -- up long term.

Have trust in youself that you always will do the right thing, make the hard decision. If you buy and the position instead declines, stop out. If you buy, but the position does not immediately rise or otherwise grieves you, then sell. But for god's sake, manage your positions, your cash, and your opportunities. You need not be always correct. And if you have proved to yourself congenitally unable to deploy such calculation in your financial dealings, then put into place a rules-based system to keep you from hurting your portfolio.

Traders and investors come in only two guises: intuitive and mechanical. (Scan ~¼ of the way down the page for the definitions.) Which are you?

"One cannot walk the Path until one becomes the Path"
-- Gautama Buddha