A negative divergence?
"I noticed in your most recent post you mentioned that your decision on stocks are not just based on charts but also fundamentals, et al. However, I think I recall you telling me that fundamentals were unimportant to you. A negative divergence, perhaps?"
It sometimes frustrates me that no matter how loudly and publicly I caterwaul this point, I still am not understood.
Yes, I once believed the fundamentals to be unimportant, but for at least 1 decade now, I consider them of paramount importance. Which means, in practice, that I monitor a list of opportunities screened initially on the basis of corporate fundamentals and opportunity, and then await the appropriate buy signal. I do not chase stock patterns based on what happens now, and only then look at the company. This is one reason my watch list rarely changes. There are not that many good companies with excellent management available at a given moment.
"A speaker at a seminar I attended made the claim that technical indicators have been developed that have fit historical data. However, he claimed that their predictive value (patterns, RSI, MACD, Stochastics, etc.) was weak or non-existent. I spent some time on a GOOG search looking for any studies that might support or reject this notion but found very little. Are you acquainted with any good studies that conclude with a correlation between technical and pattern analysis and future price movement?"
Your first sentence connotes curve-fitting, although not its denotation. To the extent that technical analysis is curve fitting, I agree. ("A head & shoulders pattern is a head & shoulders pattern 100% of the time -- but predictive 30 or 40% of the time. At best.") I believe most investors rely on the quiver of arrows that is technical analysis but rarely hit the bulls-eye, mostly because they misappropriate the tools, apply them incorrectly, or fail to apply them in context, the continuum. (See discussion re JNJ below.)
Despite the fact that I agree conceptually, I disagree with the entire argument. Each investor must base his or her decisions (buy and sale) on some form of analysis; technical analysis is as good as any, because, at its simplest level, it studies the supply and demand for the stock. And it is our investment in the stock that manifests our interest as an investor. To forsake this tool is akin to a cardiologist who forsakes an EKG because it too is mere squiggles on paper, all sound and fury signifying nothing. I would prefer a different doctor, thank you very much.
Several readers have written, both here and privately, re Johnson & Johnson/JNJ. They fret about the "ugly" chart pattern seen in the chart below...
Well, yes, it appears a possible "double top" is in place, that the share price is below the two crucial simple moving averages (50 day and 200 day), and that... well, the chart just looks ugly. So it is understandable that it confuses some investors. When placed within context, however, it's ugliness quickly transmutes to beauty (read: opportunity)...
Opportunity does not get much better than this moment for Johnson & Johnson/JNJ. First, and most important, I assume investors have done their own due diligence with re to the company, and they seek only the optimal moment to purchase, which is the province of technical analysis. In the chart above, I revert to simple peak & trough analysis. (Or charting, pure and simple -- a subset of technical analysis. Just as arithmetic is a subset of mathematics.)
Having discerned Johnson & Johnson (the company) belongs in our (your, my) portfolios, the next item to decide is when to buy JNJ, the shares. Now, this moment, seems especially optimal, if not auspicious, as I imply in the paragraph above. The recent decline to ~$60 from ~$70 (only ~15%!) found support at the 13 year up trend line (delineated in the chart above) and turned higher only yesterday.
Although the shares have yet to leap several hurdles (oops, there is that damned technical analysis again!), that the stock has turned higher precisely where and when it should is an excellent beginning. Why? Because buying the stock on long term support (and a 13 year up trend line is fine support -- oops, more technical analysis!) provides the opportunity to purchase at a discount a market leader (and Johnson & Johnson, as I state often, is my poster child for the ideal growth stock) and at its stop loss. Oh sure, the stock could decline to ~$57-56 and still remain fine, so I am okay with purchasing at ~$60, with a stop loss of ~5%, at which level a different chart picture builds. I would sell (stop out for the small loss) and move aside to get a clearer picture on what that pattern and setup proves to be.
The possible upside? Note the flat trend line at $70 -- as the two lines converge, a powerful ascending triangle nears completion. Once breached, an intermediate term target of ~$100 seems probable...
As always, determine your objectives, the tools to get you there from here (it is insufficient to say, "I invest to make money" - there is more to the process of investing that that!), and have patience during the minor oscillations that will occur in your time frame, no matter how long that might be.
And, finally, a bit of news. I have been asked many, many times over the years to manage money. And so, at last, it has come to pass; I now manage clients' portfolios as an investments manager. I use all the tools - scoffing at none - that help achieve investing success. And, unlike other investment managers, I tailor your portfolio around your objectives, not making my particular and peculiar preferences fit your objectives and risk tolerances. (No curve fitting here!) This venture is all about investing, not short term trading.
If this investment management opportunity interests you, please contact me.
-- David M Gordon / The Deipnosophist
Labels: Market analyses