Monday, February 12, 2007

Using History as a Guide

It is said that those who ignore history are often doomed to repeat it and today I’d like to give you a history lesson – or rather a way that you can learn a stock’s history without the stock even knowing it. And while the past is not necessarily prologue – what has happened in the past frequently happens again in the future – especially in the stock market. To put it bluntly what goes up must come down. The problem to be solved is in determining when it is time to come down.

I’ve mentioned before that one of the best ways to keep track of your longer term or even swing trades is by using the weekly charts. And I know I’ve discussed the EMA 90 and its relationship to the weekly charts to a degree that even frightens me with its obsession. Now I’m going to show you two charts labeled A and B and I’m going to remove all other identifying characteristics because the stock themselves really don’t matter – only the lesson counts. And at then end of the discussion you tell me which one you would rather invest in this week.

First we have A and I show it in a weekly format with its 90-period EMA. The second figure is of the distance A normally travels from its 90-period EMA on the weekly frequency. You can see that A has had a great run lately and seems to be slowing down.

Next we have B illustrated in the same manner. The second figure clearly shows that B has strayed far from the 90-period EMA but the rate of difference is slowing down.

The bar charts provide a historical reference for these stocks going out to 2 years ago – you can see clearly how they don’t get too far away from the 90-period EMA and when that distance becomes extended they normally hurry back to the touchstone.

So give a picture of the history with no other information which stock do you think has a higher probability of going up and which might be heading down - A or B?


Bullish Jim said...

Great illustration as usual.

For what it's worth, stock B has made me a lot more money than stock A in my life.


History can be a good way to tell the future.