Accumulation

The only sector in the equities market showing accumulation is the precious metals mining sector (the GDX ETF is a good proxy). Check the share volume numbers over the last five years.

Whether you believe we started a new bull market since March 2009, or we are in the midst of a rebound within a secular bear market, the volume has to mirror the price action to be confirmatory. Other sectors are showing declining volume, despite higher prices, which is non-confirming. Liquidity injections (like the most recent $1 trillion Euro bailout) may prop up equities, but the foundation could be built on tooth picks.

See disclaimers on side bar.

Disclosure: long precious metals mining shares, long some biotechs, and natural gas pipeline companies.

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.


http://www.investopedia.com/terms/g/goldencross.asp


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).


http://www.investopedia.com/terms/d/deathcross.asp

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.


http://stockcharts.com/h-sc/ui?s=heb

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

Today's screw up

I purchased shares of a biopharmaceutical company this morning, hoping to capitalize on the positive results of an upcoming Phase III trial. It's been trending up, but sure enough, as soon as I purchased some, it dropped in price. Fine by me--hopefully the news is good next month and I should profit if the results are positive.

I also got greedy, hoping to buy some out of the money call options at $0.40, with the bid at $0.35 and ask at $0.45. My limit order never hit, as I was looking to buy many options, all or nothing, as I didn't want to incur unnecessary transactional costs (multiple buying units). I realize this illiquid market would have inefficient pricing and wide spreads, but my order never got filled. I was a enraged initially, until I figured out there weren't enough sellers out there to fill my buy order. And that anger turned to relief when the underlying stock priced dropped even more. Had my order been filled, I'd be down over 60% right now!

That's why trading illiquid markets is so treacherous--you can guess right, do everything right, and still lose money--or miss out on a big opportunity. Or in my case, you could save a lot of money, even if you're wrong.

Obviously, I have to change my strategy tomorrow because I'm still bullish on the company. I just have to analyze the open interest and volume better, and hope someone takes my bid. I'll probably have to raise my bid at the market opening, but the funny thing is that today, even tho my bid ended up being high--the all-or-nothing bid was never filled.

Live another day to do it again tomorrow.