Catching a Falling Knife

[rederob]

Averaging down is sometimes confused with catching a falling knife, but they are fundamentally different.
Here's a falling knife:

AGL was last at present prices back in 1997.
Here's a chart where averaging down might apply:

The simple and clear difference between the two is that AGL has a trending series of lower lows, while EVN has a trend of higher lows.
AGL presently has no redeeming features, while EVN has a pipeline of profitable projects over and above its currently successful operations.

The chances of getting hurt by a falling knife outweigh the odds of success. Best to wait until it has bottomed, and afterwards see if there's a good reason to want to pick it up.

 

[barney]

Couldn't agree more @rederob

I think most who have been "punting" on the Market for some time would agree that "averaging down" is far from the "bad guy"

Assuming we have done the appropriate research to justify our position/s, , And,


Have an "uncle" point where we either know we screwed up, or accept the continued risk is "unacceptable"


Many may/will disagree, and i don't particularly wish to have an argument about it, but, that is my assessment.

 

[divs4ever]

well i do both , but i have a few scars in my feet to prove i am not 100% perfect

BUT averaging down CAN work , just be cautious enough to take some cash off the table in the bounces ( OST/ARI would have been horrific if hadn't rescued some cash on the bounces .. but i still lost some cash overall )

but each stab at a sliding stock MUST be a judgement call ( on it's own ) and know when to bail while still in profit ( AMP , IPL . ORG and several more )

 

[So_Cynical]

Averaging down requires you to already hold some and a falling knife doesn't, nothing at all wrong with buying into a falling share price, just have to be prepared to let it run and maintain position size discipline. AGL really cannot be in that much trouble.

 

[divs4ever]

i cannot vouch for AGL

but time will tell

( i absolutely agree on size discipline , especially on my winners )

 

[rederob]

Averaging down requires you to already hold some and a falling knife doesn't, nothing at all wrong with buying into a falling share price, just have to be prepared to let it run and maintain position size discipline. AGL really cannot be in that much trouble.

It's more about probability.
Would you prefer to buy low if a stock was trending upwards or if one was in a continuing downtrend?
When neither the technicals nor fundamentals support a buy the safer choice is always to wait.
Buying on hope alone is not a winning strategy.

 

[divs4ever]

It's more about probability.
Would you prefer to buy low if a stock was trending upwards or if one was in a continuing downtrend?
When neither the technicals nor fundamentals support a buy the safer choice is always to wait.
Buying on hope alone is not a winning strategy.

for me that would depend on the particular stock , for example i stock like BHP i am happy to buy small parcels in a down-trend ( but that trend starts below $18 now ) , for a stock like WPL i am more liable to buy one parcel in a big dip ( i really don't feel comfortable with a large quantity of WPL ) and wait for a later dip ( i DRP WPL but not BHP )

if a stock has a trend of disappointing results ( like say ORG , AMP , to mention just two ) i am unlikely to buy any ( and more likely to exit when there is a chance to break even ) , let alone in a dip or downtrend .

some stocks are just going nowhere nice

 

[rederob]

for me that would depend on the particular stock , for example i stock like BHP i am happy to buy small parcels in a down-trend ( but that trend starts below $18 now ) , for a stock like WPL i am more liable to buy one parcel in a big dip ( i really don't feel comfortable with a large quantity of WPL ) and wait for a later dip ( i DRP WPL but not BHP )

if a stock has a trend of disappointing results ( like say ORG , AMP , to mention just two ) i am unlikely to buy any ( and more likely to exit when there is a chance to break even ) , let alone in a dip or downtrend .

some stocks are just going nowhere nice

Picking an arbitrary price (or even a price based on technical support) is a flawed approach.
Let's use BHP as an example ( illustrative chart below). Its a cyclical stock that rides commodity boom cycles. Would you really buy into a company that was doing its best to survive during the down cycle? Or would you wait for the cycle to change?
The chart below maps the ...
Rolling five-year annualised excess returns: commodities versus MSCI World Index

And here's how BHP was trending into the cyclical 2016 low:

Long term support was $22 and your way of thinking may have bought into BHP around this price point. There were no technical or fundamental reasons to buy into BHP after support was broken. However, waiting a bit longer would have seen commodities prices rebound, while a strong technical buy was signalled at $17 (2016 TSI crossing):

 

[divs4ever]

and January 2016 was the last time i bought BHP ( @ $14.80 ), but that doesn't mean i will NEVER buy more ( at an attractive price ) ( my average share price is just below $29 so i think i can drag that down if given enough time and cycles )

and regarding the current cycle , i think this cycle has jumped prematurely , and on that theory i am watching for an unexpected dip/correction in the share price , if i am wrong i hold a comfortable amount of BHP shares ( for me )

but yes i am looking at BHP to be a long term survivor ( hopefully paying some divs along the way , and yes i am hoping to lower my average price further over the coming years

i started in the market VERY late 2010 , so before that is just history ( that i might be able to learn from )

i am quite willing to wait for that arbitrary price ( for years if need be ) and since i rarely buy big parcels , if the price slides further i consider if to buy more relatively small parcels ( and yes some years Commsec really loves me ) but that is the price you pay for caution

i would rather pay the extra brokerage than have bought the current holding at say $35 ( with S32 still incorporated )

 

[rederob]

Here's another falling knife:

Although BLG had a good news announcement this morning, its share price barely moved.
That's most likely due to the fact that commercialising its technology takes time, so putting money into BLG now is only for those with a very long term view of its ability to turn a profit.
The next TSI crossing will be a buy signal for me.

 

[peter2]

IMO BLG is not an example of a falling knife. The BLG price has been going sideways for over a month. The price fall is over. It may or may not resume. You need quick reflexes to catch a falling knife because there's little time to think. If you ignore time (Renko charts) or stop time then the "falling" knife becomes much easier to catch.

Recent example of a falling knife opportunity was buying gold and gold stocks on today's open. It would have been a brave move. Too late now has the POG has rallied off its low. What's very interesting is whether this rally in gold is a "dead cat bounce" and there's further to fall. The safe haven instrument may be dead. Crypto has rallied while gold fell. Hail to the new King, Crypto.

 

[divs4ever]

picked up a parcel of GOR ( while i slept late )

am not sure bravery had anything to do with that

i planned to ( trying to ) buy some in the coming months , and so far so good

but further to fall ( in the right stocks ) probably won't deter me either from cherry-picking in the dips ( i would rather be a year early than one hour late )

 

[rederob]

IMO BLG is not an example of a falling knife. The BLG price has been going sideways for over a month. The price fall is over. It may or may not resume. You need quick reflexes to catch a falling knife because there's little time to think. If you ignore time (Renko charts) or stop time then the "falling" knife becomes much easier to catch.

Recent example of a falling knife opportunity was buying gold and gold stocks on today's open. It would have been a brave move. Too late now has the POG has rallied off its low. What's very interesting is whether this rally in gold is a "dead cat bounce" and there's further to fall. The safe haven instrument may be dead. Crypto has rallied while gold fell. Hail to the new King, Crypto.

Thanks @peter2.
As I am not a trader the time component is less important to me than magnitude and trend.
From an investment perspective renko tells me the only thing that is important to me, and that's price.
In the past 15 minutes BLG increased 20%.

I might keep posting more renko charts that look near turning points .

 

[peter2]

I thought that a good reversal setup on the BLG chart was a buy at 0.036 (last high). No it wasn't me. My eyes glazed over reading about the novel dual-n-wave laser diode. You must have some other followers looking over your shoulder.

I agree with you on the Renko charts. Sometimes time obscures the truth.

 

[rederob]

I thought that a good reversal setup on the BLG chart was a buy at 0.036 (last high). No it wasn't me. My eyes glazed over reading about the novel dual-n-wave laser diode.

I'm trying to keep things simple.
You correctly noted that the past month had sideways movement.
And I chose this company's chart to see if the knife had further to fall as another 1 cent decline was still in play (long-term low). As I said at the outset ....

Best to wait until it has bottomed, and afterwards see if there's a good reason to want to pick it up.

I was very surprised that at time of posting this morning that BLG had no traction on their really good news. But maybe after people's eyes cleared up they saw the LED in BLG's pencil.

 

[rederob]

I agree with you on the Renko charts. Sometimes time obscures the truth.

Reiterating your point; I doubt many see a falling knife in this candlestick style chart:

It shows four separate periods of consolidation preceding slight price increases.

And here's the same part of the above chart (which is by the minute) when seen on a 15 minute time scale:
Both charts show the same $40 fall in POG over a 90 minute period. (Anyone wanting to check this can look at a spot gold chart from UTC 4:30 on 6 August.)

Getting back to this thread's title, it was meant to be about the distinction of a share still in freefall and without saving graces, versus finding one that appears to have "fallen" and deserves a much closer look.

What I like about the renko style of chart is that it cuts out noise, although you can add any other technical indicator you find useful to your trading/investing style. I personally like to add TSI as inflection points are a handy precursor to buy/sell confirmations.

 

[UMike]

Dip Or Falling Knife????

 

[Sean K]

View attachment 129151

Dip Or Falling Knife????

It's been dipping and falling since mid June, but should be some support around $5.90-6.00. There were some anns out today, maybe they weren't too good.

 

[rederob]

It's been dipping and falling since mid June, but should be some support around $5.90-6.00. There were some anns out today, maybe they weren't too good.

It's also in a continuing uptrend, well within its median price range:

That said, we can find "knives" all over the place depending on chosen timeframes and price intervals.
All I want to point out is that buying into a "fall" continuation because the price seems cheap or you think it might be about to bottom is more risky than waiting for a reversal "with a reason". That is, it's more likely than not that the knife has safely fallen and can be picked up.
In that regard, I am presently eying AMP.

 

[peter2]

The thing about catching falling knives is gambling on the possibility that the knife has stopped falling. I'm considering buying copper and OZL and SFR have been falling in sync with the correction in copper prices. Has copper got further to fall? I've no doubt that copper will rally again soon.