Friday, June 27, 2008

Stock Bias Test Results

I ran a post on Friday titled, Stock Bias Test, which has become one of the more popular pages on my site in only a few days. My site doesn’t generate a large number of comments per blog post, maybe 2 to 4 per post on average, but this topic got more than 30 people to respond (a huge success in my “comments world”). I guess I do a poor job in sparking conversation based on what I write.

Anyway, everyone seemed to like the exercise of analyzing the charts without a ticker symbol or frame of time.

I asked a few questions:

  • Which stock would you buy below based on the nameless & dateless charts? (listed 1,2,3,4)

  • How would you rank them in order of technical characteristics?

  • Would you avoid buying of any of the stocks below based on price and volume?

  • Would you short any of the stocks below?

Overall, many of you struck out and did not get the analysis right but I do have to say a that a few of you did a wonderful job.

The best response in the comments that I could find clearly comes from Alex who runs a blog on his google pages.

He nailed every chart (I wonder if he figured them out) as a few of you did.

#1 is the strongest buy. The last candle on #1 sets the high of the chart, therefore it’s moving into uncharted terrritory with no overhead sellers. Also, the last dip down to the 40-period line was on low and decreasing volume, thus few sellers there. Then it spiked off the 40-period MA with strong volume. Then it continued the uptrend for 5 candles.

#3 would be my second strongest buy for similar reasons, but I’d like to see what the next few candles do.

#2 & #4 I would leave alone because of the heavy selling volume on the last dips. But I wouldn’t short them because they are still above the 40-day MA.

I had to hide Aurelien’s answers for chart #3 as he guessed it: AAPL.

Steven Mac may have summed up the approach to the analysis the best by saying:

While the exercise is based upon price & volume alone or techincal aspects, for the record I wouldn’t move into a position unless I can see at least:

1) Risk-to-Reward.

2) RS Strength

3) Industry Group/Sister Stock Information

4) Fundamentals on Ownership

5) Overall Market Direction Factor

Overall – it was a great exercise and a wonderful success. I plan to do more of these in the future (possibly bi-weekly if everyone stays interested).

The original snapshots of the charts I uploaded on Friday are highlighted in blue (on the charts below). As you can see, #1 (BIDU) and #3 (AAPL) were super successful and #2 (MS) and #4 (BSC) broke down.

Proper risk/ reward setups and sell rules would have saved you from losing large amounts of money in MS and BSC so don’t worry if you got them wrong. Worry if you got it wrong and then avoided selling a clear loser.

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