A Share Trader with a Theory

We have a share trader in the house with a theory. It’s a theory about price action and how many, many followers of technical patterns get wrong-footed at important turning points.

Over the past decade or so, we’ve noticed that charting, or technical analysis, has become much more popular. That’s probably because of the perception that it’s much easier to make money from responding to squiggles on a chart than doing the hard years of analysing a balance sheet and cashflow statement.

But the more popular something becomes, the more you have to worry about it not doing what you think it’s going to do. Because when everyone’s looking at the same thing, you can bet that the opportunity to make a profit from that ‘thing’ has long since disappeared.

Recognising this, our share trader developed a theory. It’s a theory that we’re not sure anyone else follows. And if no one knows about it, then the ability to profit from this theory of price action still exists, because no one else has worked it out to arbitrage the opportunity away.

The share trading theory is a good one because it’s simple. And one simple tenet of the theory is that people are mostly lazy and respond to signals that turn out to be false. The signals turn out to be false because they’re largely brought about by everyone looking for and responding to the signal in the first place!

Our share trader reckons this herd like behaviour at important turning points provides an opportunity to make big profits from taking the other side of the trade from the ‘crowd’. And before long, the crowd recognises its mistake and rushes back to the other side.

Without giving too much away, here’s a recent example of the crowd maybe getting it wrong. They haven’t recognised it yet. But when they do, look out…

Below is a chart of the ASX200. As you can see the 5,000 point level is an important one. It didn’t break above that point in 2010, 2011, or 2012. But it finally did in February 2013. It got everyone excited and once breached, share traders who look for these things jumped on board.


But the momentum from that important break above 5,000 didn’t last long. In fact, the index turned down pretty quickly. It’s now resting right around the 5,000 mark, an important juncture for the bulls and the bears.

Our share trader reckons this could be a classic false break. He’s seen it happen time and time again, which is why his theory, unlike, say Keynesianism or monetarism, works well in practice too.

We’ll have more on this theory soon…stay tuned.

In the meantime, buy gold and sell paper. When Bernanke says he doesn’t yet see a problem, it’s time to take out some cheap insurance if you haven’t already done so.

Greg Canavan
for Markets and Money

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From the Archives…

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The Fed’s Funny Money is Losing its Mojo
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End of the Australian Boom?
19-02-13 – Satyajit Das

Bond Guru Still Likes the Unthinkable: US Treasuries
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Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing. He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’. Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors. And, through the process of confirmation bias, you tend to sift the information that you agree with. As a result, you reinforce your biases. This gives you the impression that you know what is going on. But really, you don’t know. No one does. The world is far too complex to understand. When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases. Greg puts this philosophy into action as the Editor of Crisis & Opportunity. He sees opportunities in crises. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines charting analysis with more conventional valuation analysis. Charting is important because it contains no opinions or emotions. Combine that with traditional stock analysis, and you have a robust stock selection strategy. With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the same mistakes that most private investors do every time they buy a stock. To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Markets & Money here. And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here. Official websites and financial e-letters Greg writes for:

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