You have two choices as an independent investor. You can rely on news media reports to determine what’s happening in the share market, or you can analyse it yourself.
I can tell you from personal experience, the last thing you want to do is rely on newspapers to form your investment strategy.
A friend of mine quipped recently that the only two reliable things in a newspaper were the date and the price.
But do you find yourself getting all caught up in the financial news anyway? Headlines such as ‘Stocks slump on global concerns’ or something similar.
Today I’ll help you work out whether you should be buying stocks or not…
Learn to trade the trend
Let’s look at a recent headline from the Australian Business Review, March 26: ‘Australian shares tumble 1.6pc as banks dive’.
‘It was the biggest one-day fall for the share market in more than three months, with the local market a sea of red...’
And on it goes. When you have your money at risk in the stock market, it’s easy to get caught up in such reporting.
This is where some basic charting knowledge can be very, very helpful. It’s at these times that you can bring up a stock chart and remind yourself what the trend is.
Remember headlines are meant to be emotional. It’s what hooks readers in and sells papers. And you can be guaranteed when the market has a big down day, the newspapers love it and bring out the emotive headlines.
But let’s get serious. You could rephrase the above headline, without altering the truth of the matter, like this:
‘The Australian market trades at seven year highs, goes down for a day, banks pause after strong price rises’.
The above headline is not emotive, but more accurately portrays the market situation. (OK, I couldn’t get a job selling papers.)
For stocks to increase in value, they must have reactions along the way. They go up. They fall back. That’s what stocks do.
But if each succeeding top and bottom is higher than the previous, then the trend is up. And that in essence, is all you need to know.
If the trend is up, stay with your position.
So don’t get caught up in the emotional news of the minor daily moves. Trade the trend until the charts tell you otherwise and signal that a change in trend is in place.
This is where the chart will help free you. Bringing up a weekly and a monthly chart will filter out all the noise that gets thrown at you in the daily headlines. Then simply look to see if the trend is up, down or otherwise and leave it at that.
Commonwealth Bank: reality versus reporting
To emphasise the point, let’s look at a monthly chart of CBA. CBA can be taken as representative of the other Australian banks, as they exhibit a similar shape, and all made new highs the previous month.
Click to enlarge
The blue line in the chart represents the 21 month moving average, the red line, 34 months.
From a wider perspective, the trend is up. It has broken over tops and is in all-time new highs. The big down day referred to in the news article, simply doesn’t register on the monthly chart.
From the October low CBA has never had a month down. If you want to get more detail, bring up the weekly chart. You’ll see that CBA has never had more than one week down from the October low of last year.
That’s telling you something. Start to view the market like this, by bringing up a weekly and monthly chart. This will filter out the minor moves and confirm the trend for you. Then headlines such as ‘Banks dive, markets in a sea of red’ won’t cause you to lose sleep or, worse, sell out of profitable stocks.
One of your objectives as a trader and investor is to take the emotion out of it. Here’s a start for you, a practical example you can put into practice straight away. On a day with an emotive and negative headline, bring up a chart and confirm for yourself what the trend is.
Do you remember all the emotional headlines from last year? There were plenty. ‘Stock markets slide on fears of global slowdown’…‘Concerns over a stagnating Eurozone’…‘China slowdown’…‘Stocks slump on concerns over the Fed tapering stimulus measures’. And on it went.
On those emotional days last year, all you needed to do was bring up the monthly chart of the All Ords, and confirm the trend. The previous monthly low from 2013 never broke. The trend was always up. That was all you needed to know.
The weight of money will tell you more about the economy than the business section of whatever newspaper you may read.
It seems every week another fund manager talks Australian recession. The weight of money suggests otherwise. The All Ords has recently broken to the upside and is at a seven year high. The trend is up. My message is a simple one; trade the trend in the chart, not the stories you read.
Don’t complicate things, or let your ego get in the way. You will become a far better trader when you cease to have an opinion about the market and merely trade the trend and manage the risk along the way.
If you’d like to know more about this process, you need to learn first how the economy moves and why, and how stock prices move to price this in.
To get started, click here.
Researcher, Cycles, Trends and Forecasts
Editor’s Note: This article originally appeared in Money Morning.