StockRats now explain: how to read and ride the wild market [Part 2 – The Small Rides]...
We now move on to see how we can take care of your ‘headaches’; the market episodes or what the chartists refer to as intermediate waves.
“Well...it sure looks like the poor stock has gotten some beating and now it seems to be on its way to a rebound. Wait a minute there, I think know what you guys are up to. Are you saying I am ready? You mean I’ve graduated? Is it time to start my trading? Do I call my broker now? How much do you want me to buy? Where did you get the tip from? Is it a reliable source? Tell me! Tell me!”
“Rex. This is my ‘Happiness Chart’.”
“Yeah I know. It’s written there. But I didn’t know there’s a stock called My Happiness.”
“No Rex. Hear me clear. This is my ‘Happiness’ chart. I’ve plotted all the happy and not-so-happy days of my life on this chart. It’s about me, my life.”
“Ah I see now. So you haven’t been quite happy especially in the recent years?”
“Don't worry about that Rex. But what else can you tell me from the chart?”
“Ahh Master StockRats. Now I really know what you are up to. You’re testing my charting skills. But to use chart for fortune-telling, that’s really my first time. So may I begin? Can I draw some trend lines on your life chart, just so I can tell better? You know...those resistance and support lines? Where should I place the first line? Hmmm... It looks like a ‘W’ formation on your happiness chart, and that’s strong indication of a rebound. Or is it a false breakout? No, it’s going to be a sideway, but maybe you have a chance...Wait! I think I see a trend; it goes up and then down... ”
“Okay...up and down...so how long then?”
“That depends on how long you live. Err...Did I get that right, Master? But worry not. Avoid the high fats, work out like me, some regular yoga sessions, keep smiling, do the hula loop and don't forget your appointments for check-up, you’ll be fine. Besides, I am tall. I am big, I am smart, I am Rex the Dinosaur and I can protect you.”
“Rex, I am going to show you the same chart, but this time, I shall add a little more information to it. Tell me the difference.”
“Whoa! Master, now I appreciate your life more. I can almost instantly see your life episodes; from your childhood days, to your falling in and out of love, and your losing of job and finally finding a great hobby that makes you happy again. The line seems to make more sense to me now. I can see why there are ups and downs. I can clearly see the events that caused each and every turns of your mood. And I can also see how long each of your life events affected your mood! Most importantly, I am suddenly able to tell that you are going to be a lot happier from the chart because I know you really love your aquatic hobby, and that’s gonna keep your spirit up and up until... well, the unforeseen happens.”
“It’s the same with stocks. But as opposed to the doctrine that there are short, medium and long term trends, StockRats see only one trend; that’s the big trend which we spoke about. As with the intermediate ‘waves’, which is a common term among the chartist, we call them episodes instead; they are the life episodes of the stock market because these ‘events’ happen and dominate the market just like what you see on my ‘Happiness Chart. If you are attentive to what the market is especially concerned with at each point of time, you’ll be able to tell these episode like you’ve just read my ‘Happiness’ Chart.”
“But what’s the purpose of breaking them into episodes and learning to read them?”
“A fair question in fact Rex; the whole purpose of trying to understand what an episode means. If you are able to segregate and see the price fluctuations in episodes like you did with my ‘Happiness’ Chart, you will be able to put see ‘chaos’ in their proper perspective and ride them. So, after we have learnt to see the big picture, we are now zooming in on the smaller ones and learn to read and ride them as well. Those waves you see on your chart are effectively made up of meaningful episodes that connect to form the overall market trend or stock price trend. This concept should help you better time your trades ‘along and within’ the waves [episodes] if you are able to figure out the underlying theme [main concern] of a market episode and should enhance your chart interpretations and analyses (for more on charting, refer to Chapter Four, page xxx).”
“But you labelled those episodes on your ‘Happiness’ chart, you know the stock market doesn’t carry labels like these.”
“Yes, the market doesn’t provide that, but the news headlines do and you will label them yourself. Your extra effort will pay off. The first thing you need to do is to put your ears to the ground and listen closely to the market gossips. There will be many. Your job is to sort them out and find the main concern. It is the one that the market is obsessed with and focuses on much of the time because it keeps coming back at the market among other smaller issues [e.g. interest rates, oil price, green technology, war, economic health, weakening US dollar, China Wind, perhaps Vietnam Wind would be the next once they get enough Viet Companies listed]. You will find that the movements of stock market or a group of stocks in this given timeframe [usually by sector] tend to be under its direct influence for as long as the concern prevails. And the waves-like features on the charts wax and wane with the beginning and ending of an episode. During each market episode, varying concerns, issues or topics may pop up in between time, confusing the market but the main concern [theme] will quickly return and remain the most influential price movements ‘determinant’ until a new major concern [theme] takes over dominance and a new wave begins. A new episode must be of different theme [driver]; that’s what marks the beginning and the end. It is important not to confuse ‘episodes’ with market phases [e.g. consolidation, decline, sideways, mark-up, etc]. It might help to understand that a market phase can be made up of a mixture of small and large but independent episodes. In a nutshell, it's like the fashion world, where designers look out for what’s in the trend. But don’t worry if you can't fully grasp the concept yet as we are now gonna use the Subprime Crisis as an illustration to make sure you do.”
....to be continued
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