Nike is a champ at staying calm. It took this year’s bad bear market to finally move the stock down by 25% for the first time since 2002. (I used a monthly chart this time because Nike has so little volatility to show.)

Taiwan Semi, in contrast, is working on its fourth 25% or greater drop in four years:

You can see that anyone with a 25% stop loss has been taken out of Taiwan Semi several times.

About this time, if I were anyone else, I would be quoting you that excellent bit of boilerplate: “past performance does not guarantee future results” and so on and so forth.
You already know that. Sure, it’s true, but it’s not an issue for our purposes in today’s example, which was choosing a calm stock for a trust fund. Or simply getting a feel for how often a stock moves and how big its moves the wrong way tend to be.

The truth is that even longtime blue-chip steadies can get themselves into trouble. For example, Citigroup and its credit fallout. Technical tools cannot predict news or foretell stupidity, unless it’s a recurring feature, that is. Just look at steady-Citi take a dive:

In most cases though, when you are dealing with well-established companies and stocks, their past performance is very much the face of their future. Taiwan Semi is probably going to continue to reverse and make bigger moves than Nike for years to come, given its cyclic business. But it is also so well established that its bad years in the near future are probably going to be a lot like recent bad years, too.

Strictly speaking, Zigzag doesn’t predict where a stock is going or when it will turn around—next week’s volatility tool is the one that does that. But Zigzag is a nice, quick way to look at how often a stock tends to drop 10%, 25% or whatever number you’d like to know. Change the parameter setting and you can check for any level you want.

What We Take from This

• Established stocks with steady management tend to behave predictably; that’s why Zigzag is useful in showing likely behavior.
• Zigzag will give you a fast scan to show how often a stock reverses direction by a set amount or more.
• The tool is preset at 9.77%, but you can change it to any number you like.
• Use a weekly or monthly chart to get a longer picture.

People who do Elliot Wave analysis (which I do not) use the tool for reading 3-5-3 cycles and such. To the rest of us, it has no real predictive usefulness for pinpointing when a stock is about to turn. But that’s OK. Because there’s another volatility tool for next week that also runs on percent and does give some hints when reversals seem to be brewing.

Respectfully,

Lynn Carpenter

P.S. To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

Source:  How Not to Get All Shook Up by Volatility

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