I’ve never written an article on how I use charts to help me find tops and bottoms of my favourite stocks. It’s part of what is called technical analysis. I should say up front that a lot of people have no respect for technical analysis. But I’ve learned and now have used charts to help me buy some good stocks at very good prices. Charts have also helped me adjust my investment strategy to more or less match the “mood” our stocks go through several times a year.
A lot of stocks go “on sale” in February, April/May and October give or take a few weeks. Seasoned investors often wait for these downturns to buy bargains and they don’t really care if they buy at bottoms or sell at tops as long as they are close.
I don’t profess to be able to perfectly pick tops and bottoms but I’m getting better. It has taken me awhile to figure out how to explain this stuff in print but I’m getting better at that too.
These past four years I’ve had lots of practice with charts and will give you just a few examples. Technical indicators helped me have the confidence to be in the stock market in March, 2009 when stocks bottomed. I have raised cash ahead of the down periods I mentioned so I would have money to buy bargains.
TECHNICALS AT WORK
My most recent experience was to wait for our favourite silver stocks to bottom around January 25 to February 1. I’ve been moving money into silver stocks but in December they were getting too high above the 50-day moving average so I waited. Our favourite gold and silver stocks peaked around December 6, 2010 and I waited and waited. The MACD, full stochastic and RSI were all heading down but my patience was really tested around the middle of January (we’ll get to what all these terms are in a minute).
You see, I had 6,200 shares of CLM that cost us around $8 per share. They were heading up as earnings were going to improve but Cliff Natural Resources bought our shares out at something over $17.25. So I had over 100 grand burning a hole in my accounts. It wasn’t easy but I patiently waited until stocks like Silver Wheaton (SLW) and Silver Corp (SVM) bottomed.
Around January 25, the full stochastic started to flatten on the bottom. The MACD also started to bottom and the RSI was oversold. It was time to think of buying. Around February 1 all three indicators started to move up which to me was a sign big money was buying. SLW bottomed at about $28. I finally found time to buy 1,000 shares at $30.80 and I bought another 700 at $32. I try to buy and sell in stages.
These three indicators come from different data, so when they are all saying the same thing I feel I’m on the right track. On December 6, 2010 when all three charts started to head down it was time to be patient. SLW was $42 at the time and dropped to under $28. I bought 1,000 shares at $30.80. See how patience paid off?
Here’s a short description of each indicator:
1) RSI, or relative strength index, shows how this stock compares to itself and others. Strong stocks usually are above 50. This indicator is smart and seems to lead.
2) MACD, the Moving Average Convergence Divergence, is a lagging indicator but does show us trends, especially on the weekly chart.
3) FULL STOCHASTIC, this shows us extremes, the tops and bottoms.
None of this stuff is perfect, however, if a stock has gone up and up and up and is further above a typical moving average (such as the 50-day moving average), then odds are it is going to drop one of these days. Generally, before a rising stock drops, it will move sideways and the charts will flatten on top. During the days when the stock goes sideways, the full stochastic and MACD flatten on top and soon the full stochastic might start to go down.
If you enter symbol SLW. TO on StockCharts you will see a good example of how the indicators worked starting last summer. First of all, SLW is what I consider to be a good silver stock. We own 2,700 shares as I write. Second silver was “in season” so to speak from around August to December. And as silver went up so did SLW.
Around December 1, 2010 the price of SLW was further above its 50-day moving average than ever in the six months before. The full stochastic was right up at the top of its chart and it seemed the stock was priced to perfection at any price above $40. The price went to $42.50 and peaked on December 6.
The full stochastic was over 80, and the MACD was right up there and the full stochastic was at a high. All three indicators rolled over and started down, down and down. On December 28 or so the full stochastic jumped up but only to 52, and dropped before it could rise to an old/new high. Often when the price of a stock bottoms and goes up but stops going up before it goes to its old high, that is a bad sign and this was a bad sign. Down went the full stochastic and the price of the stock just kept on falling, as did the MACD and RSI.
There was no reason to buy that stock all that time. Patience really paid off. Around January 25 the RSI, a leading indicator, bounced off its low. But one indicator normally is not enough. I waited. Keep in mind the stock had dropped a lot, the indicators were far down and signs were more or less opposite to what we saw in early December. One by one each indicator left its low and in a few days the full stochastic was above 20.
While we can never be sure this will last it certainly was a lot safer to buy SLW at $29, $30 or $32 while the charts were going up than at any time the past month or so. I had 1,000 shares at a cost of $20 or so, so I bought 1,000 shares as soon as I could get around to it at $30.80. A day or so later I bought another 700 shares at $32 or so. They are $40 as I write on February 23.
My average cost is around $28 so we are up over $25,000 on those shares and SLW has become almost too large a part of our holdings. I like SLW because it is a special sort of silver producer — it lends money to silver producers and as payment contracts to buy silver at more or less a fixed price often for 20 years. So the company has no heavy equipment, a small labour force, low costs and hence a very good outlook for healthy profits.
Andyismostlyretired.Betweenplayingwith hisgrandchildren,blowingsnow,talkingon thephoneandtravellingabit,Andypublishes anewslettercalledStocksTalkwherehetells whathedoeswithhisstocks.Ifyouwantto readitforfreeforamonthgotoGoogle,type in StocksTalk.net, gotofreemonth,clickon formandclickgo