John Bell, 11th October 2011
Peggy, and my audience:
Thank you for bringing the latest “John Bell” missive to my attention. I did receive a copy of the e-mail that you forwarded to me. At times, his logic got lost in extraordinarily sloppy grammar and syntax.
I recollect that, just before pumping Jammin Java Corporation, our mysterious “John Bell” person solicited subscriptions to his “stock pick” service. Given the response and comments that were posted on this blog, it seems that he managed to get a lot of buyers. Since “John Bell” pulled all of his advertisement from finance.yahoo.com, I have received two of his e-mails. I am presuming that I received the same e-mails from “John Bell” as did his subscribers. Given the lack of guidance and support that has been forthcoming from “John Bell”, I hope that those who did subscribe to the “John Bell” stock pick service have now been sufficiently embarrassed after giving him such a considerable amount of money for nothing useful in return.
I now turn my attention to the latest e-mail from “John Bell”. Attached, please find the text of that e-mail:
I must admit, I’m not a fan of using technical analysis to guide investment decisions. For those who don’t know:
Technical analysis is the art of looking at past price movements to predict the future.
On the other hand, fundamental analysis is looking at the income statement and balance sheet etc to guide decisions.
As I say, I’ve never been a big fan of technical analysis or “charting”.It all seems a little too much of a pseudo-science to me, like acupuncture.
After all, it wasn’t the chart pattern of Apple (AAPL) in 2005 that caused it to [rise from] $38 to $380.
It was the ipod, the ipad, the macbook air – All the things that are analyzed by fundamental investors and ignored by technicians.
But there is one caveat.
In the short-term, some technical analysis can help you.
You see so much of today’s trading volume is made up of short term technical trading that the chart patterns become self-fulfilling prophecies.
It’s like a financial crisis or a run on a bank.
Perception creates the reality.
As soon as people panic, however irrational the reason to panic was at first, soon enough so many people are panicking that there IS a real reason to panic!
In technical trading, when the most commonly known patterns emerge, so many traders “make the trade” that it forms the pattern they were expecting.
Here’s the only chart pattern you need to know about.
It’s very simple.
Most stocks’ trade in a range.
A $5 stock may trade for three months in the range of $4 to $6.
What has happened is the stock has created a support level at $4 and a resistance level at $6.
This means absent a rush of buying or selling the stock’ will find it hard to break $6 or fall below $4 – Thus creating a range it bounces between.
But, and here’s the important bit.
What you need to look out for is when the range is broken.
When the prices breaks past $6, as soon as it hits $6.10 or so it will usually shoot up.
It is often the start of a new, higher trading range.
Put another way, once the chart breaks a resistance level, the resistance is removed and it will continue higher.
Of course, the same occurs on the downside too.
A chart that is falling will hit support levels, once it breaches the support level it often will continue falling.
It’s the most basic technical pattern, but pretty much every other pattern is just an abstract, unnecessarily complex form of resistance and support.
One other thing, resistance and support will get stronger the more times the chart hits the level and fails to break it.
Every time it hits $5.97, $5.98 and then retreats back to the $5.50 level it has strengthened the resistance.
This is simply because start to realize there is resistance at $6, so every time it gets near they sell (achieving the highest sale price before resistance).
As I said at the top, I’m not a big fan of technical trading.
But if you’ve done your research and you like a companies fundamentals enough to take a position.
Then considering the technicals can help you get the best price possible.
In short, I translate technical analysis as follows: “how to lose a lot of money really fast.”
To use technical analysis ususally involves either writing your own analysis and charting software or purchasing one of the myriad of software applications out there on the market. In short, these are a waste of time and money. Once you account for your time, transaction costs, and short-term capital gains you would be lucky to have a halfpenny in your pocket. Aside from all of that, if 10,000 people are using the same particular technical analysis software application as you are using, then your chances of being ahead of the pack is nearly zero. Thus, you will likely do no better than the average of the 10,000 people and likely do no worse than the average. If the average has only a halfpenny at the end of the day, then it seems nonsensical to be that average.
After having read Philip Fisher, Napoleon Hill, Joel Greenblatt, and most of the writings of Benjamin Graham, I have come to the following conclusion: to succeed, simply define a goal and work hard towards that goal. In the area of your finances, this involves the following: decide how much money you want to have 20 years from now; account for the short and long term capital gains taxes; periodically create a list of good companies that are selling for a cheap price; allocate your then available resources appropriately amongst the top 10 companies of that list; where appropriate, use a DRIP; and hold.
Most of all, have titanium nerves.