Don’t Get Caught In the Crowd
May 28th, 2008 | By Charles Delvalle | Category: Stock Market InvestingYou see it all the time; a stock jumps 20-30% in just a few days. Suddenly, the average investor sees what is happening and decides to join the bandwagon, hoping to catch some of the move. After jumping in, the stock comes down 15% and the investor is at a loss.
This type of loss is one of the most common mistakes investors make, but is also one of the easiest to avoid. Take a look at the chart below to see what the situation looks like.
This is a chart of Sirius Satellite Radio (SIRI). In 2006, they were on a steady downtrend but rallied to move through their 20 and 50-day moving averages in June. In just 4-5 days, Sirius went up nearly 20%. This was simply too far, too fast and here’s why:
The Slow Stochastic and RSI indicators show you how much momentum any given stock has moving up or down. When both of these indicators show extreme conditions (readings above 80 or below 20), they signal a potential reversal of the trend.
In this case, the Slow Stochastic was above 80 and the RSI was near that point as well, meaning the stock was overbought and a reversal should follow. If you followed these indicators, you’d wait to buy stock since you’d know that there was a good chance that the stock would go down in value after you bought.
By using these indicators before you buy a stock, you’ll consistently pay less per share and see profits sooner.
Good trading,
Charles
Source: Don’t Get Caught In the Crowd
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Charles Delvalle is a self-taught market-timing professional and value analyst who's followed and invested in the market for the past ten years. He uses a unique combination of technical and fundamental research to pinpoint rapid profit opportunities with stocks and options.
Charles is also a staunch contrarian and takes pride in finding undervalued sectors and discovering undervalued, cash-rich companies. He frequently mocks government stupidities and points out the "inaccuracies (or lies, take your pick) that government reporting frequently dispels as "truth".
