What the Ocean Teaches Us About Investing
Stockscores Foundation for the week ending July 9, 2018
In this week's issue:
In This Week’s Issue:
- Stockscores’ Market Minutes Video – The Price of Uncertainty
- Stockscores Trader Training – What the Ocean Teaches About Investing
- Stock Features of the Week – Abnormal Breaks
Stockscores Market Minutes – The Price of Uncertainty
Markets tend to overprice major events in anticipation of those events, causing an unexpected reaction when the event actually happens. This week I discuss how uncertainty is priced in to the market, my weekly market commentary and the trade of the week on AMD. Click here to watch this week's Market Minutes video.
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Trader Training – What the Ocean Teaches About Investing
A few years ago, while we were living in Maui, my daughter got her Scuba diving certification which meant I had a new partner to go diving with. On a beautiful, sunny day we set out from the beach that we lived on to go for our first father-daughter dive.
I expected it to be a relative easy and safe. Kapalua Bay is calm most of the time and we snorkeled there almost daily. I had done shore dives in that location many times and was comfortable with it because it was quite shallow and I knew my way around.
We swam out from the beach to about 15 feet of water and then sank to the bottom to move out toward the mouth of the bay. There was a little Nurse shark that could usually be found under a ledge there that I wanted to show her.
As we moved outward, I realized that we were moving quicker than I normally would and it seemed quite easy. We were now in about 30 feet of water and nearing the open ocean where the depth would drop off in to some interesting rock formation where there were usually lots of sea life to look at. However, I could feel the current was not normal so I signaled my daughter to surface with me so we could get a look around.
Once on the surface, it became clear that there was a strong current pulling us out to the exit of the bay. It was something that I had never experienced in that location before so it was a bit of a surprise but it was important to keep a level head and figure out the best strategy.
When caught in a rip current, you have two choices. One, let it pull you out until it dissipates or two, swim perpendicular to it until you exit and then work at getting back toward shore. Swimming against a rip current is what many people will do, only to quickly lose the battle against the current. Despite that knowledge, we gave swimming against it a try for about a minute and quickly realized that we were only going to exhaust our energy. It was impossible to make any headway.
Now, I am in the water with a 13-year-old who is not too excited about getting dragged out in to the open ocean where the big whales often cruise by. Swimming sideways to the current was not a good option because the mouth of the bay was very rocky and treacherous as the ocean swells crashed over them. We could not swim against the current, so I decided we would try something that was only possible because we had scuba tanks on our backs.
We sank to the bottom and crawled along the ocean floor, grabbing at the sand and rocks to pull us forward. It was hard work, but not impossible or as exhausting as trying to swim at the surface. After 15 minutes of crawling like babies, we were back on shore and met by one of the familiar sea turtles that hung out in shallow waters.
So that does this have to do with investing?
The market has a current too; it is called the trend and fighting it is a fast way to lose the battle for profits. When you look out at the ocean, it is not always easy to see the current. When investing, it is much easier to see the trend.
Take out a ruler and draw a line on the price chart across the bottoms and tops. If those lines are sloping up, you have an upward trend. If they are both sloping down, you are in a downward trend. If one is up and the other is down and converging toward one another, you have a base forming that will lead to the next trend when it is broken.
You must analyze the chart that is appropriate for the length of time that you intend to hold stocks for. If you are a long-term investor, analyze the weekly chart. If you intend to hold for a few weeks or months as a position trader, look at the daily chart. Shorter term swing and day traders will analyze the intraday 15-minute chart.
If you enter a trade and the market trend changes, get more aggressive with your exit because there is a good chance that the market trend will drag your stock down.
Most of a stock’s movement is dependent on the trend of the overall market or industry group. Take the time to gauge the trend for the style of trading you are doing.
Once you figure out the trend, don’t fight it. Trade with it or don’t trade at all.
As a closing comment about swimming in the ocean, always be aware of rip currents. Every year, people die because they get caught in one and panic. The ocean, like the market, has powerful currents that must be respected.
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This week, I ran the Stockscores Abnormal Breaks Market Scan. This looks for stocks making abnormal price and volume moves on the daily chart. Here are two charts that stand out:
MCF is breaking out of a cup and handle pattern on the daily chart through $6 resistance. Having broken the downward trend line early this year, it appears the stock is changing its long-term trend. Position trade with support at $5.60.
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DEPO is moving up with strong volume today and is breaking through a downward trend line of resistance. The stock may stall at some resistance around $8.50 but if it can break through that then there is good upside on a turnaround for the stock. Position trade with support at$6.90.
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