The Only Thing That Really Matters in Investing
Why technical analysis is much more than just chart reading... The only thing that really matters in investing… A look at some of Greg's favorite patterns and strategies…
Editor's note: The Digest team is in Palm Beach, Florida for Stansberry Research's annual Spring Editors' Conference.
So in lieu of our normal fare, we're featuring a special series from Ten Stock Trader editor Greg Diamond.
As we noted yesterday, Greg's résumé includes working for a $3 billion hedge fund and a $35 billion pension fund prior to joining the Stansberry NewsWire team last year.
In the first installment of this Digest series, Greg shared his backstory that eventually led him to working for Stansberry Research. Today, he'll discuss several of his favorite technical indicators and patterns he uses to find the best trading opportunities in the market each week...
I will be honest...
It took me a while to grasp technical analysis, too. But time and time again, I've witnessed the incredible power of understanding what is happening now... just like my former boss told me.
One of my goals at Ten Stock Trader is to educate subscribers on this incredible value.
I want you to see much more than the trendlines and patterns, and understand that we are studying the behavior of market participants... We are learning from history.
There's nothing wrong with wanting to know WHY a certain stock will move... But I am much more concerned with WHEN that stock will move and WHAT the price will do (i.e. how much will it go up or down).
And think about what really matters in investing – WHEN you buy and WHEN you sell. The WHY is less important when it comes down to the goal of investing: Did you make or lose money?
That's all that matters.
Perhaps the greatest value technical analysis provides is that it is both a trading strategy and a risk-management system wrapped into one.
In today's Digest, I'll explain this strategy and system in more detail...
I'm highlighting several of my favorite technical indicators and patterns that I will use often in Ten Stock Trader.
There are hundreds of technical terms and uses out there. The indicators I'm discussing below are what I have found to be the most useful. I use them frequently. Make sure to familiarize yourself with the list below. (I've also created a technical analysis glossary on the Stansberry NewsWire, which contains a broader glossary of technical terms that you can access here.)
If you're confused by any of the information I mention below, don't worry. I'll walk my Ten Stock Trader subscribers through everything in detail when the time comes.
This is most likely a brand-new way to look at the market for most people, so it's going to take some time to get used to. But once you understand the basics, I promise you'll begin to see the market in an entirely new way.
Let's get started...
First up is price divergence...
I look for price divergence across major indexes. This will be a common focus in my weekly updates and in my live feed. When one index makes a new cycle low (or high) while another doesn't, this creates divergence.
That's usually a sign of a reversal on the horizon. It can be tricky to spot this pattern, but it's valuable analysis to understand...
Notice the divergence between the Dow Jones Transportation Average and the Dow Jones Industrial Average. You can see that the Transports' lows (the red trendlines) are much lower than the Dow's lows (the green trendlines).
You can also see that these lows in the Dow trended up ("higher lows") while the lows in the Transports trended down ("lower lows").
This is a divergence between the two indexes. Notice how the divergence in both instances above resulted in a big move as both indexes shot higher.
Next up, let's look at moving averages...
Moving averages are constructed by taking an average of a time series over a given period. The 50-, 100-, and 200-day moving averages ("DMA") are widely followed averages to determine support and resistance points.
Many trading systems are geared around these averages in some capacity.
Right now, the 200-DMA on the S&P 500 Index is at a big support level (meaning the S&P 500 hasn't dipped far below it in a while). You can clearly be see it in the chart below...
Now, let's talk about price symmetry...
The market tends to trade in equal legs or movements, especially in corrective patterns.
Specifically, in a bull market, a correction usually has three legs, where the length of the first leg is equal to the third leg. Here is a perfect example of price symmetry from the S&P 500 last year...
Notice the first leg in each pattern is about the same size as the third leg.
Also, notice how after the third leg was complete, the market rallied.
Spotting price symmetry is important.
The relative strength index (or 'RSI') measures the momentum of a stock's price...
It uses a scale from 0-100.
A reading of 30 tends to be at or near oversold levels and a reading of 70 tends to be at or approaching overbought levels.
You can see the RSI and how it hit the 30 level at the bottom of this chart in the S&P 500 and prices rallied thereafter...
Similar to price divergence is RSI divergence...
This metric looks for differences between the price of an asset and its RSI level.
This can signal buyers losing momentum on the upside, or sellers losing momentum on the downside...
Look at the circled points on both the chart and RSI indicator in the bottom panel. See how the trend in price is rising while the same points on the RSI are declining?
This is divergence – and it was a warning sign of buyers losing momentum. Look how prices fell for another two months after this signal triggered.
Tomorrow, I'll show you two more technical strategies we'll use regularly in Ten Stock Trader...
This includes one of my favorites, which even many professional analysts tend to overlook. I'll also explain how we'll use these strategies in Ten Stock Trader to create profitable trades no matter what is happening in the broad market.
In the meantime, if you have any questions about Ten Stock Trader or anything I've covered so far, I'd love to hear from you at feedback@stansberryresearch.com.
Editor's note: Right now, we're looking for folks who are interested in "beta testing" Greg's brand-new Ten Stock Trader product.
It's an interesting and unusual way to potentially double your money – or more – every six months. It's no wonder Porter wants to ultimately charge as much as $1,000 a month for access to Greg's research.
But right now, you can get your foot in the door for a discount of up to 85% off what others will eventually pay. And if you sign up before tomorrow night, April 18 at midnight Eastern time, Greg will also throw in a special bonus – valued at $1,888 – at no additional cost. Click here to learn more.
New 52-week highs (as of 4/16/18): Genco Shipping & Trading (GNK), KraneShares E China Commercial Paper Fund (KCNY), Monsanto (MON), Pioneer Natural Resources (PXD) and W.R. Berkley (WRB).
A quiet day in the mailbag. We'd love to hear your early thoughts on Ten Stock Trader. Drop us a line at feedback@stansberryresearch.com.
Regards,
Greg Diamond
Palm Beach, Florida
April 17, 2018