Fundamentalists believe in the intrinsic value of the true and inherent worth of each investor in a relationship which will consider a different intrinsic price or value of a stock in the relationship according to his own judgment and therefore, no two investor will be able to agree on what the intrinsic worth of a share should be. Because the investors do not agree, there occurs a gap between the market price and the intrinsic price. The intrinsic price is based on personal judgment, hunches, likes, dislikes and other psychological and emotional reasons. These subjective, inactive judgments are added to the objective, quantifiable data about the relationship to arrive at the intrinsic value. Unfortunately, while buying stock in the relationship, investors hardly ever show equal attention to both. While one investor might give undue importance to gut instinct, another might be so caught up in the realities of the economy and industry that he might not see it necessary to go down to the company's subtle, but unique and equally specific realities. As a result, a share that is over-rated in the eyes of one investor, in under-rated for the other.
Technical analysis, on the other hand, holds that no matter what the reasons are for the highs and lows in a relationship, a correction or reaction invariably occurs, and it is the result of the known and foreseeable realities affecting the relationship translated into the sentiments of ALL investors in the market. The average price discounts everything; and there is no scope for disagreement on the value of a share at any given point of time.
Unfortunately again, investors do not always follow the mantra of evaluating stock before buying; buying at the bottom and staggering stake over time. They don't see any reason to adapt their investing pattern to the market trends. They wait for a time when the situation might suit their investing capability, sometimes indefinitely. If one share does not allow for a particular sentiment, whether bullish or bearish to prevail over the medium-term, the investor looks for new avenues that fit into his silo of sentiment, whether bullish or bearish, to invest .
A retracement is a countertrend move. Retracements are based on the thought that prices will reverse or "retrace" a portion of the previous movement before resuming their underlying trend in the original direction. Percentage retracement thinking comes from three main sources: Dow, Gann and Elliott Wave theory. Putting the three together, the retracement could be anywhere from 12.5% to 100%. Elliott in his writing observed that the Golden Ratio 0.618 (the ratio of two sequential numbers in the Fibonacci sequence) was the basis of the construction of the Great Pyramid and could be observed in nature, such as in the arrangement of sunflowers. Since human activity was determined by the laws of nature, stock market retracements would often be 0.618 or 0.382 (the reciprocal) of the previous move. Given that I am using stock market activity to determine the trading game that is a relationship, this becomes a bit of tautology, yes? :)
I would advise the relationship investor to look for retracements to achieve a 12.5 percentage levels - anything greater might warrant some introspection. It is also possible to establish a zone where a retracement might end and give yourself the leeway of decision that allows you a gradual withdrawal or buy-in, depending on which direction the market is moving.
When the market shows a downward trend, the wise investor keeps an eye on the last high or peak to understand whether to hold or bail - more often that not it is that last high that acts as resistance level that stops him from selling because it represents the hope that if the price was ever at that level, perhaps once it reaches there again it might even surpass it. Indeed, when a security breaks through the resistance level, technical analysts believe the security will reach new high prices. But the market does not usually rise beyond the lowest edges of the Resistance Zone because selling pressures are too strong for it to withstand. So if the last peak does not give you the confidence that you are looking for, maybe it is time to let go.
Often, in spite of the market showing an upward trend, the investor looks the last low or trough to evaluate the retracement or support level the relationship is likely to moderate or correct to - he is prepared to sell if the stock price threatens to drop any lower than a level on the Support Range that is acceptable to him because the market is now bearish as far as he is concerned. Ironically, the support price is also the price at which other investors are attracted to the market. If indeed the stock sees buying pressure from other investors, it will most likely rise again. The bright side is that the longer the price stays at a particular level, the stronger the support at that level. Many traders believe that the stronger the support at a given level, the less likely it will break below that level in the future. So my advice is, hang on to that security for a little longer - you knew that a correction was due, so a stabilized price level may just be a blessing in disguise.
Technical analysis, on the other hand, holds that no matter what the reasons are for the highs and lows in a relationship, a correction or reaction invariably occurs, and it is the result of the known and foreseeable realities affecting the relationship translated into the sentiments of ALL investors in the market. The average price discounts everything; and there is no scope for disagreement on the value of a share at any given point of time.
Unfortunately again, investors do not always follow the mantra of evaluating stock before buying; buying at the bottom and staggering stake over time. They don't see any reason to adapt their investing pattern to the market trends. They wait for a time when the situation might suit their investing capability, sometimes indefinitely. If one share does not allow for a particular sentiment, whether bullish or bearish to prevail over the medium-term, the investor looks for new avenues that fit into his silo of sentiment, whether bullish or bearish, to invest .
A retracement is a countertrend move. Retracements are based on the thought that prices will reverse or "retrace" a portion of the previous movement before resuming their underlying trend in the original direction. Percentage retracement thinking comes from three main sources: Dow, Gann and Elliott Wave theory. Putting the three together, the retracement could be anywhere from 12.5% to 100%. Elliott in his writing observed that the Golden Ratio 0.618 (the ratio of two sequential numbers in the Fibonacci sequence) was the basis of the construction of the Great Pyramid and could be observed in nature, such as in the arrangement of sunflowers. Since human activity was determined by the laws of nature, stock market retracements would often be 0.618 or 0.382 (the reciprocal) of the previous move. Given that I am using stock market activity to determine the trading game that is a relationship, this becomes a bit of tautology, yes? :)
I would advise the relationship investor to look for retracements to achieve a 12.5 percentage levels - anything greater might warrant some introspection. It is also possible to establish a zone where a retracement might end and give yourself the leeway of decision that allows you a gradual withdrawal or buy-in, depending on which direction the market is moving.
When the market shows a downward trend, the wise investor keeps an eye on the last high or peak to understand whether to hold or bail - more often that not it is that last high that acts as resistance level that stops him from selling because it represents the hope that if the price was ever at that level, perhaps once it reaches there again it might even surpass it. Indeed, when a security breaks through the resistance level, technical analysts believe the security will reach new high prices. But the market does not usually rise beyond the lowest edges of the Resistance Zone because selling pressures are too strong for it to withstand. So if the last peak does not give you the confidence that you are looking for, maybe it is time to let go.
Often, in spite of the market showing an upward trend, the investor looks the last low or trough to evaluate the retracement or support level the relationship is likely to moderate or correct to - he is prepared to sell if the stock price threatens to drop any lower than a level on the Support Range that is acceptable to him because the market is now bearish as far as he is concerned. Ironically, the support price is also the price at which other investors are attracted to the market. If indeed the stock sees buying pressure from other investors, it will most likely rise again. The bright side is that the longer the price stays at a particular level, the stronger the support at that level. Many traders believe that the stronger the support at a given level, the less likely it will break below that level in the future. So my advice is, hang on to that security for a little longer - you knew that a correction was due, so a stabilized price level may just be a blessing in disguise.
1 comment:
Get out of that place! NOW!
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