The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

09 May 2008

What do you think?

A reader (who prefers anonymity) sent the message below; I consider his (or her) technique interesting and creative.

I've been using a technique I find helpful in determining buy points on stocks that have pulled back after an extended rise. To illustrate, I will use the CMG chart. Take the 12/31/07 HIGH of 155.49 and subtract from it the 1/4/08 CLOSING price of 127.01, the first high volume close below the 50dma. Multiply the difference by 1.62 and subtract the result from the 12/31/07 high. Thus, 155.49-((155.49-127.01)*1.62) = 109.35 projected low. Actual low was 108.00 on 1/9/08.

Sometimes the original low price projection isn't hit for an extended period. When that occurs, I keep it in mind as the basing continues. Usually, however, I find the low occurs around this point, the price then rises above the 50dma, then falls back again. This is another chance to utilize this technique, as the high reached on the recovery above the 50dma can be used. I find the first signal the strongest, the 2nd signal useful, and the combination of the two useful as well.

In the case of CMG, note the pullback above the 50dma, establishing a high of 135.47 on 1/25/08. The first high volume close below the 50dma in my mind is the 2/7/08 close of 107.73. The fact that it closed below the 200dma is the reason for this higher volume and I must say I haven't paid attention to this before. Instead, I have focused on the high volume close that often occurs as the price falls below the 50dma once again. In any event, using the above formula and the high of 135.47 on 1/25/08 and the close of 107.73 on 2/7/08 results in a projected low price of 90.53.The actual low is 90.09 on 3/10/08.

Again, I use this method as a tool. I know I don't have to tell you nothing is perfect. I do find this helpful, however, and hope that this may help you in some way.

Finally, another price point I find very intriguing is when a good (subjective) company's stock price reaches 21% below the 200dma; this ties in with timing as well. I think I have mentioned that I believe some of what I do involves, perhaps, a sliver of your "tyme" concept.

Your comments are welcomed... For example, does this methodology withstand your rigorous (back) tests?

Thank you,

-- David M Gordon / The Deipnosophist

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