Forum Archive Index - February 2003

[Phaedrus <Phaedrus@techemail.com>]

Travis, 
       You began by stating there was no evidence to support the concept of 
Support/Resistance. I gave some examples of it, and you now state "whether it 
exists or not, it is a virtually useless concept". Wrong. Consider the market 
dynamics that lie behind the CDI chart I posted. Many would-be sellers of CDI 
at prices above 23 cents will have capitulated over the course of 3 years, 
reducing their offer until they were able to sell. The longer the 23 cent 
resistance level is continued, the fewer the sellers in the price range above 
this level, leading to what I think of as a "partial vacuum" above the 
established resistance level. The same principle applies at Support - just 
beneath it is the same partial vacuum, a paucity of buyers. Keen buyers will 
have kept raising their bid until their order was eventually filled. This is 
why breakouts from previous support/resistance levels are often explosive. They 
burst through the "depletion zones" that lie just outside the 
support/resistance.
  You ask "What exactly are we supposed to *do* with this marvelous insight 
that stocks have support and resistance anyway?" This is a very surprising 
question coming from someone that claims to have a deep understanding of 
technical methods. If you are a seller of CDI, you know you have a reasonable 
chance of selling if you ask 23 cents. To try and get 24 cents - a price that 
has not been reached in years - would be foolishly optimistic. The chances of 
your order being executed are slim. Conversely, say you have come to the 
conclusion that CDI is undervalued, and want to buy. A commonsense, low risk 
entry point is at or just above previous support. It would be foolish to buy at 
the 23 cent resistance level, because if you have mistimed your entry (or, 
heaven forbid, made a mistake in your valuation!) you have bought at a high. 
Far better to pay a cent more, buying at 24 cents on the breakout, when (and 
only if) this occurs. 

 You claim I require the benefit of hindsight. I repeat - where, exactly, do 
you see hindsight as having been used in the TLS chart? 

Another claim :- "Trend following systems have the fatal flaw that they result 
in very high turnover..." Nonsense! Take another look at the TLS chart that 
began this discussion - ONE trade in over 5 years! I have posted many charts of 
stocks in long-term uptrends, with the comment "it is all but impossible to 
beat buying and holding stocks that are in steady long-term uptrends like 
this". Anyone wishing to avoid the costs associated with more active trading 
can easily devise a system based on long-term trends that will signal very, 
very few transactions.

 "The normal course of the market is for trends not to exist. When a true trend 
is in progress it is likely that the majority of the movement will take place 
before it becomes apparant that this is a trend and not a retracement." Wrong. 
Look at the chart of any stock in a long-term uptrend - look at SKC, MHI etc. 
The uptrends were clearly evident long before any really big gains were made.

"What good is a system that indicates nothing in advance?" It will tell you 
when a stock begins a trend. It will tell you when a trend ends. It will tell 
you if a trend is strengthening or weakening. It helps you gauge the 
significance of any move, by relating it to the volume traded. It will identify 
stocks that are trendless. The use of indicators such as oscillators can 
provide excellent entry and exit signals for stocks that you have decided to 
buy or sell on the basis of value analysis. You do not have to be able to see 
into the future in order to trade effectively. I am unaware of ANY system that 
reliably indicates anything in advance.

 Why would I look at buying TLS in the event of a trendline break? Because it 
could mean the end of the downtrend. It could be the beginning of an uptrend. 
It would put this stock on my radar screen, and I would therefore look into the 
fundamentals of the stock. You may perhaps think that I eschew fundamental 
analysis. I do not.

"How will you know if the upward break is not just a false signal?" When (if) 
the upward price action continues, and the stock goes into an uptrend.

".....and how will you estimate your future profit?" There are many technical 
and fundamental methods, but they are a waste of time. I cannot know in advance 
what my future profits will be. Neither can you. You can estimate your little 
heart out, but when push comes to shove, you can only take what the market 
gives you.

  So, you got out of TLS "pretty much at the peak, aeons ago." Well done. You 
further state "The stock was overvalued long before it got to those levels. 
Telstra had ceased to be an investment and quickly became a speculation only a 
short time after it was floated." One can therefore presume that this was a 
technical exit, since a fundamental investor would have exited only a short 
time after the float - thus missing out on most of the 250% return that you got 
in a single year. You claim that "valuation approaches gave an earlier and more 
reliable signal." Huh? Even if this point were conceded (!) surely the most 
important issue is which approach gave the most profitable trades. No contest 
in this particular example. This spectacularly successful technical trade would 
have been largely missed by anyone whose exit was triggered when TLS became 
"fundamentally overvalued" or "speculative".

 "Support and resistance levels rarely ever coincide with levels of intrinsic 
under and overvaluation." I agree. My experience is that stocks that are 
trending generally overshoot well past their fair valuations. To me it makes 
good sense to buy undervalued stocks at or near support and sell overvalued 
stocks at or near resistance. Valuations are only personal estimations, based 
on whatever information is available in the public domain. Support and 
resistance levels are set by the market. They are therefore of much greater 
import. I am often wrong, the market - never. It is also bigger than me, so I 
don't argue with it.

".. if you really can achieve a return *double that of the market, for extended 
periods of time* then you shouldn't be mucking around here - go apply for a job 
with the Quantum fund..." Where did you get this "quote" from? I have never 
made any such claim. In any case, I do not want or need a job. So long as my 
trading profits more than sustain my chosen lifestyle (as they have for many 
years) I am content.

 Travis, it is good that you have found an investment system that is profitable 
and suits you. Just don't make the mistake of thinking that your current 
approach is the only one that works.

  You did make one very pertinent statement :- "Successful traders use money 
management and risk management systems designed to work for their trend 
following or reversal systems." I agree with this completely. Have you ever 
considered the possibility that your failure as a trader was caused by poor 
money management/risk management systems? I mention this because it sounds to 
me as though you were wiped out by a single really bad trade. ("I was 
profitable as a trader, it worked while I was at it, at least until the point 
where I bought index put options just before the bear market began")

 Travis, as much as I enjoy a good discussion, I will not be continuing this 
thread. I have in the past spent (wasted) far too much time on people who think 
there is only one way to skin a cat. Their way.

      Regards,
                Phaedrus.

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