Well duh!

look in the mirror

Mirror, mirror on the wall...

When Carly Fiorina became CEO of Hewlett-Packard (HPQ) she exhorted all of us to "look in the mirror and see an honest reflection." Good advice; HP needed to do that. It's in that spirit of self-improvement that I started to hold up the mirror to some of my fairly recent trades in the stock market to see what lessons can be learned.

Lesson #1: Even an idiot will succeed some times, just by dumb luck. Ouch! Not untrue, but ouch!

At the end of December, I bought shares of Endo Pharmaceuticals (ENDP). I don't recall, really, why I bought that particular stock. Most likely it turned up on Zacks' list of "#1 Ranked Stocks" or other such list of stocks "ready to take off." What did I know?

ENDP stock chart

As you can see from the ENDP chart, this was not a bad trade. Bought at $7.40 per share and sold, in three lots, at $8.85, $9.20, and $9.45 per share. It was a profitable transaction.

Looking at the buy in hindsight, it turns out to have been almost perfect timing. Of course, at the time it was purely accidental, just dumb luck. But looking back with my new-found knowledge, I can see that two of the signs I understand (sort of) were right.

The Average Directional Index (ADX) indicator had been rising for several days. ADX shows the strength of an up or down trend, or whether a stock's price is essentially going sideways. It is based on two other indicators: Positive Directional Indicator (+DI) and Negative Directional Indicator (-DI). These basically say who's winning the battle, the Bulls or the Bears.

What you want to see in the chart is the ADX line going up and the +DI line (colored green in the ENDO chart) above the -DI line. When the +DI is on top, it basically means the Bulls are winning the tug of war; when the -DI line is on top, the reverse is true — the Bears are winning. My buy came just as the +DI line crossed to above the -DI line. More from StockCharts.com Chart School

The Chaikin Oscillator was crossing from negative (below 0) to positive (above 0). The Chaikin Oscillator tries to capture shifts in momentum. What you want to see in the chart is the line crossing zero and rising steeply. It's used in combination with other indicators to give buy or sell signals. More from StockCharts.com Chart School.

The price had risen in November, then fallen in December, but leveled off at a higher level than before, and there had been some days of higher than usual volume on rising prices.

Selling. I know why I sold. I had heard of the "January effect" in the stock market — it tends to rise during the month of January, then fall back — and I was nervous about keeping my profits. But with 20-20 hindsight, I wish I hadn't sold yet.

To be fair to myself, I'm not sure I would make a different decision even today. If I had even known about it, I would have seen that the Chaikin Oscillator line was falling to zero (bad news) and the +DI line was also falling (Bulls are weakening). Had I been truly smart, I might have noticed that the -DI line was also falling (a good sign) and that even when the Oscillator moved below zero in mid-February, the ADX line was still going up (good sign - the trend is still strong).

If I had had my wits about me, I also might have noticed that the price was still above the 200-day moving average and the 50-day moving average was still rising steeply.

If I had had the foresight and acumen to notice all those things and held on, the shares would be worth today more than twice what I paid for them in December. This is a prime example of seller's remorse. If only...

Lesson #2: Even if you get on the train by accident, don't get off as long as it's going someplace you want to go.

ABV stock chart duh award

Here's another case of getting off the train way too soon. Companhia De Bebidas Das Amers (ABV) is a Brazilian brewery. Needless to say, this is another one that has me crying in my beer.