Black Thursday

chart down

In search of "lessons learned"

Yesterday was a pretty grim day for my Trader Paul portfolio. I decided to close eight of my positions, all at a loss. In the clear light of morning, I've gone back over these trades to try to figure out what I've been doing wrong.

When I laid all eight charts out on the table before me, I had one of those "Well, duh!" moments. As my momma used to say, "It's as plain as the nose on your face." I'm going to use Internet Gold as my example.

I have essentially been buying into a stock when it appears to have recovered from a pullback after a peak. In the case of IGLD, it had gone from a high of $7.85 down to $6.43 and was on its way back up — or so I thought.

IGLD chart
IGLD 2-month chart

As shown by the blue arrow, I have been focusing on the upswing and — it should go without saying — assuming it would continue upward (dashed arrow). Which is not all that bad an assumption when a stock is clearly going up and in a strong up market. But I have been ignoring signs of weakness in the charts, signs that are all too obvious when I put the charts together.

IGLD indicators
IGLD indicators (see chart above)

Leading up to the buy point (green vertical line), there are four bad omens:

  • Falling price momentum (PPO)
  • Falling buying pressure (+DI)
  • Declining cash flow (CMF)
  • Declining relative strength (RSI)

Those same bad omens are present in the charts of six of the eight stocks I sold yesterday. (Click on the small charts for the write-up with full-sized chart.)

ENI GEAC GNA IGLD IVAC POL

Besides that, in some cases, the dip from which the stock appears to be recovering is lower than the previous dip — that is, a stock on the way down, not up. In a perverse sort of way, in several cases I have been identifying stocks I should have sold short instead of going long!

Making bad matters worse, the markets in general are going down, or sidewise at best. So by going long I am essentially betting against the market. That's about as practical as betting against the house in Las Vegas!

NASDAQ chart
Nasdaq 1-year chart

The Nasdaq has been stepping down since January in a succession of lower peaks and dips. It has matched the lows of October. The next level of support would be the lows of August.

DJIA chart
Dow Jones Industrial Average 1-year chart

The DJIA is also stepping down, and is now back to the 10,000 level, which has a lot of psychological significance, and the DJIA is flirting with breaking below that. If the Dow breaks below 10,000, the next support level would be the low of October.