Choosing an Entry
For any stock or Exchange Traded Fund (ETF) position, at some point you must choose to buy it. That is “picking an entry”. You “enter” the trade at some point, a moment in time.
Now there are countless books written about how you “can’t time the market”. These are all written by academics who go to work every day for the government. Think about it…
There are also a few good books written about market timeing that say “yes, you can do it, but it’s hard”. These are typically written by folks who traded individual stocks for a living.
The fact is, to quote the title of one of my favorites: “Yes, you can time the market!” And I’ll show you how.
These techniques work best with a basket of stocks, such as an exchange traded fund, rather than an individual stock. Why? An individual stock has many particular events that happen that cause the stock chart to move in ‘less than useful’ ways. There are regularly scheduled earnings anouncements. Stocks tend to drop before the earnings anouncement as folks wait to find out the earnings before they buy. If you are not on the earnings conference call, you miss the trade. By the time it hits a chart, it’s largely over. A stock basket averages all those earnings announcements together. If they are trending up, you have time to get in before all the companies are done announcing and without searching them all out. So start using this method on major averages and large ETFs.. Only then should you move to thinly traded flakey little ocmpanies with no earnings; where clearly it’s much harder for a chart to “predict”.
Here is an example chart for the “Brazil” basket of EWZ. We know it is on an up trend (price is above the moving average stack) and we’d like to buy some, but if we buy at the wrong time, it will take a month to get back to even… so how do you know “NOW” is the time to get in? Look at the chart…
The first thing to notice is that a trend in motion tends to remain in motion. We dropped for about 6 months on this chart. Then we have about 5 months of “flat roll” where you can trade the rolls, but owning as an investment was just “dead money”. Finally, at the end, we have a new up run of about 3 months (and yes, some months are counted in both ajoining trends… you don’t know that the new trend started until after the next month came… So expect to have 4 months to a couple of years of a trend to work with. Whatever the stock has done for the last couple of months is what is most likely next month (until proven otherwise). You will be right 4 or 6 times before you are wrong once. That’s a winning ratio.
Next, for the running up part of the chart, notice the little “red dots” near the price? That is the PSAR – Parabolic Stop And Release. It is intended to tell you were to set a stop loss order for getting out if a move goes against you. What I find more interesting is that an entry in an up run tends to come right about the time it is saying to exit! When the red dots touch the price. In a falling market, the left side of the chart, it does a better job of saying to get out if approached from the top side. So you can use it as a stop loss guide, but in a bull run in a hot stock it also tells you a cheap entry. (It may not always touch, look at the local pattern, that pattern will tend to repeat.)
Is the price AT one of the moving averages? Prices tend to bounce off a particular moving average (based on what the “market maker” broker tends to follow). That is when you buy an uptrend (or sell a down trend). Is the price well away from those moving averages? Price MUST in the long term return to those moving aveages one way or another. The further the price is from the moving average stack, the worse the entry is likely to be. Now look at the “ripples”. There will often be a pattern (and that is often a monthly cycle as options expire) Is there a visible tendency to, say, dip on or near the thrid week of the month at options expriation? There is your first clue. In this case, EWZ, it tends to get near the 25 day then take off again.
Now look at the second indicator and third indicator below the stock price. Slow Stochastic and Williams %R. Notice that each of them has spiked down; right at the best entry, the “dips”? They also tend to spike up at the best times to enter a “short” on the falling side of the chart and they act as “oscillators” for entery and exit during the “flat roll” at the bottom where price and the 3 moving averages are weaving.
So if you are thinking of buying a stock, and it’s in an established up trend (price above 25 day above 50 day above 75 day Simple Moving Average) look for the “dip” pattern and see if Slow Stochastic and Williams %R are both spiked down indicating a buyable dip.
Finally, RSI. RSI is an indicator of sentiment. In a falling stock it tends to oscillate between 20 and 50. Short at 50, cover at or near 20. In a rising stock it tends to osccilate between 50 and 80. Buy at 50, sell at or near 80 (or put a trailing stop loss order in place). For Rollers, it is less useful, other than confirming that it’s in a rolling phase (1/2 way each side of the center line) during a transition from falling to rising or rising to falling.
Now here’s a nother chart of slightly different indicators.
This is the same basic price and movement data, but in a different presentation.
First off, notice that the stock tends to run along the bottom red Bollinger Band when trending down, but just after reversing to the upside, it tends to hug the upper band. That point where price crossed to the top (after bouncing back and forth at the bottom) and then hugged the upper band was the start of the run up.
Notice, too, that volume peaks at the bottom. About October it is largest. Near Christmas is just dries up even on a down spike. Then in January, another down spike has low volume (but not AS low since Christmas is a dead time) but the following month, volume to the downside drives prices up. Volume in this bottoming phase slowly dies out after that October peak, and eventually volume is ‘to the upside’, so prices are “put up”. (The broker gets a commission on volume, not on price, so markets tend to be ‘volume seeking’ machines.) In particular, look closely at January. Volume rises on up moves, declines on down moves. Volume is to the upside.
At that same time the MACD lines cross zero and head up with “blue on top”. Looking down at DMI we see that it is “red on top” during the declines, but “blue on top” during the up run. At the bottom, MACD tends to ‘weave’ with the zero line and DMI has weaving red /blue with the ADX (‘strength’ indicator) showing weak strength of ‘below 20’.
Finally, in March, the ADX line shows strength of ‘above 20’ with ‘blue on top’ while MACD has cleanly crossed to positive and is ‘blue on top’. Stock price hugs the upper Bollinger Band and we’re off to the races. The ideal entry is in that “higher low” that fails to go lower back in January, but this March entry isn’t all that bad.
Now study those charts. Pick a bunch of theoretical buy / sell points. Ask when would I put in place a “buy if touched” to buy into a stock as it rises through your price and when you would put in place a “sell if touched – a Trailing Stop Loss” to protect your gains.
1) Identify the trend – Rising, Falling, Rolling Reversal
2) Where is the price compared to the SMA stack? Are their cyclical actions?
3) What do Slow Stochastic and Williams %R say is the right time to buy?
4) Is RSI telling me the same thing as the other indicators? Has it changed from oscillating between 20 /50 for shorts or 50 / 80 for longs such that the last “low” or “high” has pulled away from the normal limit case? That is likely to mean a major change of trend and makes your trade direction a bit suspect.
(Look at the bottom point where the price has a “crash bang tinkle” of the same price spike down for about 1.5 months in a row. Now look at RSI. The “down dips” pull up from about 20 to 30 to near 40. Telling you that the ‘bear market drop’ trade is wearing out. Something similar happens at tops, but pulling away from 80 to 70 to 60…
So that is how to “time an entry”. Done right, the entry gains you a whole month. Done wrong it loses you a month. Done horridly, you buy wrong, then sell out at the “entry” point and become an “exactly wrong accidental day trader”… Don’t do that! If you enter at the wrong time, do a reasonable “work out” by following up with a proper entry with a “double down” buy, then sell half when back at a local high point via a trailing stop loss or deliberate decision to sell.
So look at that chart again? Was it time to enter yesterday? Today? Soon?