Of Mice and Men

Obvious by now is the knowledge that (the process of) investing is no walk in the park. When to buy? When to sell? When to hold? It all becomes crystal clear only in retrospect. The process is made more difficult by the investor's own emotions -- panic and flee (sell)? Or stand ground and perhaps buy more? The commentators and experts blare forth from the TV and other media with their sought-after but not necessarily correct 'expert' opinions that only confound further the process. Add to that combustible mix clients who correctly butt their opinions into the mix, and failure becomes the likely result. How many investors can withstand the heat of the kitchen, especially when that heat is from the kitchen burning down?

Many clues exist to ease the process. Volume, for example, is a crucial tell-tale. For example, how high is high, if a stock rises on a continuing diminution of volume? Consider Google/GOOG (below)...

[click on charts to enlarge]

Decreasing volume (participation) argues the possibility of 'air pockets' (sudden plummets of price) due to unexpected news, whether bad or good. So the investor plays the odds by favoring stocks in which increasing volume supports past and future price rises. Volume equals participation, but also power and thrust.

Recall my posts, especially the initial one, that argued for Green Mountain Coffee/GMCR. I showed that volume increased alongside the increasing share price. Something big was about to happen, despite the huge price move the stock had already enjoyed. Thus, volume qualifies as a tell-tale. Volume does not behave in a vacuum; both Green Mountain/GMCR and Google/GOOG could yet surprise investors, despite their recent volume trends.

Trend and area patterns qualify as two more of my 4 Horsemen of visual analysis. Within any trend (or continuum), stocks (always) oscillate, and those oscillations could take on the form and shape of wild but random swings or areas of price congestion (area patterns) -- even within a primary (major) up trend. Can a knowledge of past patterns and trends drive expectations? I think so, and thus base much of my market perceptions on this experiential understanding.

The stock, shown in the chart below, was a big winner; at least until recently. The most recent negative price action has not soured its longer term rising trend, though; in fact, I believe the stock merely enters into a short to intermediate term base, while it consolidates its breakout from its primary (or major) base.

Note first the double bottom made in October and November of 2008, which shows retrospectively what I shared here repeatedly then of increasing signs of bullish behavior -- amid the deafening cries of Armaggedon. Then comes the powerful 5 month up trend that runs to $50 from $18... and breaks above its all time highs at ~$40. (See chart below.)

Note how, in the chart above, the recent decline registers as barely a speed bump to date) in the profoundly bullish 6 1/2 year area pattern (ascending triangle) and base.

Talk about opportunity. Here is a stock that qualifies as a leader: it rises in advance of the general market, its price:volume trends match the ideal (volume expands with a rising price and contracts with a declining price), and whose recent price decline comes right on schedule. This all (and more) only serves to hang bullish threads on a vividly positive tapestry.

I continue to own the stock shown in the two charts above because of my expectations for its future trend action; more precisely, the resumption of its long term up trend. In fact, I likely will buy more shares at an opportune moment that I expect will occur soon. (I perceive the thesis to measure trends and patterns by time rather than price to be a fascinating, and profitable, perspective. Unfortunately no interest materialized for this topic.) Of course, I will give this or any stock only so much rope before I cut the cord to prevent that 'rope' from becoming a noose.

Three months into an intermediate term rally, and by now investors everywhere realize that it is better to perceive market trends with objective measures, not as a monolith; monolithic advances and declines are exceedingly rare. The Great Panic of 2008 (my term) was over almost as quickly as its onset was 'sudden'; it endured for even less time than this most recent up trend.

In the end, though, an investor really knows nothing in advance; he or she can only plays the odds. Unlike gambling, however, the investor can and should control the favorable outcome.

Full Disclosure: Long Google/GOOG, Green Mountain Coffee Roasters/GMCR, and the other stocks alluded to in the included charts and discussion.
-- David M Gordon / The Deipnosophist