Intrinsic value help

[tinhat]

Tinhat,

Do you have some simple timing indicators you would recommend? I am currently creating my own value investing system and would be interested in some simple TA indicators.

Cheers

Oddson

Oddson, I've come to the conclusion that one needs to combine both fundamental analysis of intrinsic value with momentum trading technical analysis in this secular bear, sideways moving market.

The most simple way to state trend/momentum trading is to buy a stock when both its price and the general market is in an up trend.

I'm only a novice, and have just started looking into trend/momentum trading. Some things I have come across:

MACD - MACD above signal line, on an upward trend, especially once it has crossed over zero. I use standard MACD settings on a weekly chart.

RSI (relative strength index).

Stochastic Oscillator - good for timing entries and exits, wait for pull-back for a buy. Also note that on a weekly chart, the stochastic oscillator can remain in the "overbought" range above 70 for months while the stock price keeps running up while buyers keep jumping on the bull run.

It can also be useful to view a daily price chart with the above indicators, but with their parameters adjusted so they use weekly rather than daily data - this displays nice smooth trends. For example, on the daily price chart, plot the MACD with the values (long 130, short 60, signal 45).

Moving Averages. I use simple moving averages (because I am a simple man). I look for golden cross (10 week above 40 week) as a bullish signal. You can use multiple moving averages (Guppy MMA or variations such as Alan Hull's Actvest MMA).

There are quite a few well respected momentum trading systems; such as Alan Hull's ActVest and Colin Nicholson. Stan Weinstein's "Secrets For Profiting in Bull and Bear Markets" also outlines a basic momentum trading strategy.

Basically, the above are all just statistical tools to help identify the price trend. If you read tech/a's thread on technical analysis the market is always in one of four phases, down-trend, accumulation, up-trend, distribution. Get in on the up trend and use a trailing stop loss system to get out at the beginning of the down trend. Use discretion to take profits, reduce exposure as you hit your targets or to close a position to take advantage of a better opportunity elsewhere.

Do not underestimate the difficulty of having two masters. At the most critical time they will not agree.

‘To my wife and sweetheart – may they never meet’

In my view both TA and FA are wonderful tools – but only in isolation. I know many disagree with me though and try to use both but eventually both tools come together with conflicting demands and you will have to make a decision under extreme fire. Jump the wrong way and you can quickly lose any edge that either tool afforded.

TA is much easier to control risk with – but it will kill any FA edge.

In saying the above - I do consider TA but it is very much subordinated in my decision making process and mainly confined to entry and alerting me to really pay attention.

I can't disagree with you more. One may have married their wife based on a sound fundamental analysis (but lets face it it was probably more because of emotion) and it might work out to be a good investment in the long run, but knowing where she is in the cycle can help ease the pain of making moves at the wrong time!

I read something in a link posted on this forum the other day about the investor that just wants the middle of the fish - others can have the tail and the head. That is very much my thinking these days. I won't pick the bottom and I won't pick the top but the middle will do me just fine.

Grab your short list of fundamentally sound companies with IVs you believe to be well above the market price. A lot of the stock prices will be in down trend or in an accumulation phase without any sign of recovery or worst still, may look as though they might just be about to turn around (because you know that if the market was rational the price would be going up right?). Identify any on that list that are are showing bullish signs. If the MACD has already run up well over zero, if the RSI and the Stochastic oscillator are already into overbought you may have missed out on most of the current bull run. If the short term MAs are well above the long term MAs (example 10week MA above 30 week MA) and you believe based on fundamentals the stock price has not yet reached its true value then you can still hop on by buying the dip and put your stop-losses in place. I though, would rather wait for another opportunity to arise where I could hop on earlier.

I do have some stocks that are income stocks that I don't look at the price of. I'm very happy with the price I paid and the yield they are achieving. For all my other growth stocks, given that more likely than not the market is going to remain sideways for some time as just as likely to experience a major break out to the down side as the upside into the foreseeable future, I'll be using fundamental analysis to pick short lists of undervalued stocks but waiting for the right technical signals to place my entry and hopefully I will be executing exits to realise profits better than I have in the past two years!

Actually, if investing in the stock market is at all analogous to relationships with the opposite sex, no wonder I'm in such trouble!

 

[craft]

I can't disagree with you more

That's fine - I say you would be in the majority there.

 

[tinhat]

Oh yeah, one more thing I've been noticing lately is looking for divergent signals. Example TGA. Looking a the price action the price has been in a down trend since January 2011. Personally, I think it is worth more than the ~ $2.20 it hit in January 2011, but the price has been in down trend since and the MACD on the weekly chart (along with the RSI and Stochastic) back this up. Note however that while the price has continued to slip (and all the moving averages 10 week and upwards) are still showing a down trend, since around November 2011 the MACD on the weekly chart has diverged and is pointing up. So, while there is no entry signal yet for TGA it is one to watch more closely as it looks like it will find support around these level and is entering accumulation and should turn around at some stage.

 

[Ves]

Oh yeah, one more thing I've been noticing lately is looking for divergent signals. Example TGA. Looking a the price action the price has been in a down trend since January 2011. Personally, I think it is worth more than the ~ $2.20 it hit in January 2011, but the price has been in down trend since and the MACD on the weekly chart (along with the RSI and Stochastic) back this up. Note however that while the price has continued to slip (and all the moving averages 10 week and upwards) are still showing a down trend, since around November 2011 the MACD on the weekly chart has diverged and is pointing up. So, while there is no entry signal yet for TGA it is one to watch more closely as it looks like it will find support around these level and is entering accumulation and should turn around at some stage.

Will any of this matter in 5 or 10 years time? I guess it depends on the reason you are entering the stock in the first place, and the time frame, but the longer the time frame the less meaningful the technical analysis and the more important the core business performance and analysis IMO.