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No pain, no gain if you want to be a successful investor

Carl Capolingua Carl Capolingua 29/06/2022
No pain, no gain if you want to be a successful investor No pain, no gain if you want to be a successful investor
No pain, no gain if you want to be a successful investor Carl Capolingua
Sometimes it’s painful being a trend follower. By definition, you’re wrong at least two times in any trend.

At the top (you don’t know it’s a top at the time!), you’re typically fully invested, enjoying everything the bull market provides. At the bottom (again, there’s no way to know this!) you’re either short or sitting on a pile of cash, so, either rejoicing the bear or waiting for the carnage to pass.

It takes a great deal of faith in one’s methodology and a bunch of guts to stick to the trend – especially after it has extended a long way. Still, this is how the big wins are made in the long run. In a bull market, it’s how you give yourself the greatest chance of holding on to that 10, 20, or even bigger bagger. In a bear market, staying the course is equally important because it can keep you from buying any of those tantalising dips which soon give way to yet another round of falls.

It all depends on your definition of pain. In a bull market, some investors weigh the pain of a loss greater than the pain of a missed win. They’d rather get out with a small profit and have the certainty it won’t evaporate, rather than risk that small profit to attain an even greater one. Not me. I hate missing out on a bigger winner, especially if it’s occurred because I chickened out of a perfectly good uptrend. I would rather lose my small win knowing I still followed my plan, and that I gave myself the greatest chance of snagging a much bigger win. I know if I stick at it long enough, yes, I will lose a few small profits along the way, but the big wins I do eventually score will more than make up for them. 

In a bear market, some investors weigh the pain of a missed win greater than the pain of a loss. They’d rather get in after a big fall hoping they’ve picked the bottom. If there is a rally, they are certain to be in profit straight away. They’re comfortable risking a loss if the price continues to fall just so they don’t miss the bottom. Not me. I don’t want to risk breaking my rules by buying in a downtrend too early. I’m happy to wait for a bounce first, for a new uptrend to establish itself. This uptrend will tell me excess demand has returned to the market. I am happy to forgo the profits the bottom pickers are already enjoying for the extra confidence I derive from making a trade with the trend, that is, from gaining a greater probability of success.

Trend followers view investing as a trade-off: Profitability vs Probability. Sure, if you can pick the exact bottom to buy, and the exact top to sell, you’re going to make a pile of profit (i.e., High Profitability). But what are your chances of doing this consistently over a long period of time? (No, actually stop and think about your own track record!) This is a Low Probability strategy. I prefer to buy and hold when it may seem like the top to others – this is because I’m backed by excess demand. I may get it wrong, maybe I do buy at the top sometimes, but more likely, the trend just keeps going. Similarly, I don’t try and buy too early, that is, I don’t fight the excess supply in the market in the hope of picking the bottom. In doing so, I aim for High Probability scenarios. You see, I figure if I get the probability part of it right, the profitability part will take care of itself!
 
Nasdaq Composite (COMP)
Nasdaq Composite (COMP)

Candlesticks give the technical analyst tiny fragments of information about the underlying demand-supply environment. White candles demonstrate excess demand over the course of a particular trading session. Last week, we observed 5 out of 5 white candles on the COMP. A nice turnout for the bulls. So, is that the low of the bear market I hear you ask? Maybe! What I can say for sure, is that it’s a very good start.

Friday’s candle in particular was a monster! Not only did it close at the session’s high, but it also closed smack bang in the short-term downtrend ribbon (light pink zone). It also closed above the peak from 15 Jun at 11,244. This ensures wherever the next peak forms, it will signal a return to higher peaks in the price action. Should we subsequently make a higher trough to 10,565, the price action will have returned to higher peaks and higher troughs. This is a fantastic indicator market psychology has returned to “buy the dip” – a first sign the bull is returning.

A few weeks ago, we noted just how important price action within the short -and long-term trend ribbons is. Just look at how consistent the short-term trend ribbon has been at terminating promising COMP rallies. Tick them off, 13,711, 12,986, and 12,320. If we see a bunch of supply-side candles (black bodies and or upper shadows) in this zone, it signals more of the same. Look out below! However, if we see further demand-side candles (white bodies and or lower shadows) and a close above the zone, the chance of a sustainable rally increases significantly. The last two candles (27 & 28 Jun) imply scenario 1 is the more likely of the two. I think we can now add 11,678 to the list of short-term trend ribbon victims...

I can’t get really bullish on the COMP until I see a close above the short-term trend ribbon, and preferably even above the static supply point at 12,320. Also, I’d prefer higher peaks and higher troughs are in place. The bear case? Another failure in the short-term trend ribbon (appears the case), or a close below 10,565. My nagging suspicion remains the bear market isn’t over until we test the 19 Feb 2020 high of 9,383. View: Bearish, sell rallies until a close above 12,320.
 
S&P ASX200 (XJO) 
S&P ASX200 (XJO)

We didn’t enjoy 5 out of 5 white candles last week, but a monster Tuesday and a solid Friday facilitated a commendable weekly performance for the local benchmark. It would have been better, however, if not for the Energy (XEJ) and Materials (XMJ) sectors which sagged 4.5% and 4.9% respectively for the week. Energy prices were modestly lower, and metals prices were hammered, with iron ore down over 4%, copper down 7%, and Nickel plunging 14%.

This week's price action up until today's stumble is most impressive, and even more impressive considering yesterday's close just pipped the key point of supply at 6758. This is the big daddy of supply points for this fledgling rally. If we see a consistent string of candles' closes above it, it could swing the whole market psychology back to the demand-side. That's a very big if, especially considering the pesky short-term trend ribbon which is going to be meeting up 6758 very soon. My tip is not to get too excited about any rally until we sufficiently deal with each of these barriers. View: Bearish, sell rallies until a close above 6,758.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.

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Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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