Sunday, May 31, 2009

Golden Cross

I normally form an investment thesis first to get a macro picture, and identify undervalued/overvalued sectors, before drilling down to individual assets or companies for fundamental analysis (company-specific financials, balance sheets, income statements, insider transactions, valuation metrics). I apply subjective analysis (competitive analysis, market potential, financing environment) and will sometimes perform technical analysis (TA) as a criterion for entry or exit points. Many technicians only perform TA--they call themselves chartists or quants. They believe that price, volume and direction determine future prices. I don't agree with their all-or-nothing approach, but I do pilfer some of their analytical tools.

So while I don't entirely rely on TA indicators, I will use them as confirmations to support my other analysis. One particularly useful TA indicator is the Golden Cross, when a shorter-term moving average crosses above a longer-term moving average (e.g., the 50-day moving average crosses above the 200-day moving average). This is normally bullish.

The opposing Death Cross is normally bearish, and accurately predicted last year's market decline (and one of the reasons I was out of the market).

I also track trading volume, both up and down. A big increase in up volume is bullish, as interest is stoked among big institutional buyers. If Fidelity is accumulating shares, that's bullish. If Average Joe Investor is buying odd lots like 55 shares, that's not so bullish (in fact, it's bearish). Likewise, if Fidelity is selling shares in big chunks, it's time to look for the exits, as distribution is taking place. In summary, volume precedes price, both up and down.

So after performing my fundamental and subjective analysis (Chronic Fatigue Syndrome, Swine Flu, clinical trials, timing, etc.), the final piece of my due diligence on HEB was checking the moving averages, among other indicators like volume. Look at the Golden Cross in early May. And look at the subsequent movement in the stock.

This is not a recommendation. Investing is risky and should be approached with caution. Please do your own due diligence.

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