| I am amazed at how few people take charting | | | | rising 50 DMA above a rising 200 DMA, then the |
| seriously. Technical analysis does not produce | | | | opposite should also be true: a DECLINING stock has |
| miracles. It is not an exact science, but it can save | | | | a declining 50 DMA BELOW a declining 200 DMA. So |
| you from an occasional disaster like Bear Stearns | | | | the big warning sign comes when the 50 DMA |
| (BSC). Let's take a look. | | | | crosses the 200 DMA on its way down. BSC bulls and |
| BSC's fundamentals deteriorated for most of 2007 | | | | bears engaged in a protracted battle in April - June |
| due to the exposure to subprime mortgages. But | | | | 2007 but the bears won when the 50 DMA finally |
| analysts still expected it to earn $6.44 in 2008 and | | | | crossed below the 200 DMA, and both moving |
| $8.98 in 2009, giving the stock as late as March 13 a | | | | averages began to decline. |
| juicy p/e of 8 and an even juicier forward p/e of 6. | | | | The real value of charts is that they reflect what |
| (Now, these consensus earnings estimates come | | | | people do, not what they say. No matter what |
| from Yahoo Finance as of March 17. Since analysts | | | | execs, pundits, and talking heads were saying about |
| are notoriously fickle, better make a note of these | | | | BSC in June 2007, the stock WAS DECLINING. You |
| numbers now as they are likely to be "adjusted" or | | | | don't need to know who is selling or why. Oftentimes |
| disappear altogether in light of the developments.) | | | | you never will - until it's too late. All you need to see |
| You could have spent days reading Bear Stearns' | | | | is the trend. |
| news, press releases, opinions, and recommendations | | | | There is nothing wrong with trying to get a bargain. |
| trying to make sense of it all. Or you could have | | | | Americans are shoppers and bargain hunters by |
| simply bought what appeared to be a "rock solid" | | | | nature. The problem with stocks is that they have |
| company in temporary financial difficulty - in short, a | | | | the ability to occasionally decline all the way to zero, |
| great value play. | | | | and I would bet anything that if you said that to |
| But the chart told a different story. There is more | | | | Bear bulls (no pun intended) back in June 2007 they |
| than one way to interpret stock wiggles, but there | | | | would have laughed in your face, citing half a dozen |
| are some basic principles all technicians agree upon. | | | | reasons why BSC was such a great buy at those |
| A rising stock has a rising 50 day moving average | | | | levels. |
| (DMA) above a rising 200 day moving average | | | | Many stocks do turn at some point. But for them to |
| (DMA). By that definition, BSC stopped rising in March | | | | do so, their 50 DMA must first do what? Right! Turn |
| 2007, when the 50 DMA turned south. A large cap | | | | up AND cross the 200 DMA that is also turning up. |
| stock typically rises in close proximity to its 50 DMA - | | | | Until then the stock is NOT a buy. You can still make |
| sometimes staying above it, sometimes dipping | | | | money by going short or trading bounces / short |
| below. When a stock starts closing below the 50 | | | | covering rallies - but it is NOT a buy. |
| DMA, it is basing. It often declines all the way to the | | | | Another universal definition of an uptrend is higher |
| 200 DMA, where it may reverse. It may even live | | | | highs and higher lows, as opposed to the lower highs |
| below the 200 DMA briefly, like BSC did in September | | | | and lower lows for a downtrend. |
| 2006. That is where value investors typically provide | | | | Knowing just the above two things about technical |
| support to a sagging stock by going bargain hunting. | | | | analysis would have been enough to prevent you |
| (I can see how value investors were tempted to buy | | | | from buying BSC as a "good long-term investment at |
| BSC in March-April of 2007 at bargain prices by | | | | a bargain price", and no smart talking heads or honest |
| looking at the September 2006 precedent, when BSC | | | | looking CEOs would have been able to sway you, |
| stayed below the 200 DMA for a month and then | | | | saving you a lot of money and aggravation. |
| turned back up, rising from the low of $127.10 to the | | | | Now people are going to talk about Bear Stearns as |
| high of $172.61 in January 2007 - a handsome 35% | | | | the next Enron. Could you have told from the chart |
| return in just 4 months if you were lucky enough to | | | | back in June 2007 that it was going to be? No. Didn't |
| catch both the low and the high.) BSC did not | | | | need to. You can't predict the next Enron or the |
| disappoint: it turned back up in late April 2007. So far | | | | next Bear Stearns but staying away from declining |
| so good. | | | | stocks is usually enough to keep YOU from the next |
| Here's where things got tricky. If a rising stock has a | | | | disaster. |