A friend recently advised that his friend, a retired skilled tradesman, has been playing the same stock, over and over, and making more than a few bucks doing it.
When I asked the name of the stock I had to smile, as I had recently benefited from playing the same game, with the same stock.
There are computer programs that will trade you or I in-and-out of a stock in a matter of minutes or hours. These include the infamous “green light, red light” type programs.
There are others that will trade in and out within the day, taking advantage of momentum plays but not revisiting the stock.
Then there are those, including myself, who will observe that certain stocks appear to be exhibiting “cycles” – rising and falling, as if in a rhythm. “As if” predictable, emphasis on “IF”.
This particular stock, in the natural resources sector, moved up and down within a fairly well defined band of highs and lows 5+ times in the period of about a year. This “looked like” a pattern, again “as if” what had happened – ramp up to a value and then ramp down in “X” amout of time – was likely to happen again
Was there compelling reason for the movement? Was there a pattern of news? A pattern of related market events that might explain a cyclical rise and fall in demand or prospects for demand? No. Not quite.
Eventually “the pattern” broke down. Not because of any easily explained market force.
Were there apparently many people “playing with” this stock’s pattern of up and down movements? Yes, clearly, as evidenced by a) chatter on the Web (message boards, etc.); and, b) the very movement of the stock. That is, the movement up and own began to look like the “lemmings” or “bag holder” game: Who is going to be stuck “holding the bag” when the Price Plummet Police arrive?
Is this a foolish, risky or dangerous investment game – this business of making investments in a stock based upon “some evidence” of ~predictable cycles? Yes, because if there’s nothing very concrete underlying the cycles – such as identifiable market forces (external to the trading pattern itself) then “the signals of change coming” are few. Likewise, such patterns could easily break down if “something real” – such as a major stakeholder dumping the stock – intervened just when you thought you knew what you were doing. Furthermore, real market influences – news and market changes – could come into play just when your confidence lead to a recklessly bold move into buying shares.
Is buying according to cyclical patterns an entirely foolish game, a fool’s errand? Not if you are particularly prescient about the movement . . or think you are or can be. This idea, of the predictability of stock price movement, has managed to sell a great deal of stock picking software.
Do I use such software? No. Could I? Would I? Sure, if I could fully study underlying analytical structure of the predictive analytics built into the stock picking / stock price predicting software. What is being measured? What are the trading signals? How are they measured? Using what standards or yardsticks for suggesting a change of strategy, in or out? How often are the signals measured? Exactly where are the signals coming from and who else is listening? Does anyone get to “listen first”?
Absent such “tools” (the only one that I would use would be entirely proprietary) what have I been looking for, when in the hunt for such “up and down opportunities?
Not too much online buzz about the pattern itself. Like many things, when too many “get involved” things change.
Stock price probably greater than 15-20 and less than 50. $5 stocks are mob stocks for the kiddies. Mob stocks are a different game. As are thinly traded stocks. As are small and microcap stocks.
I prefer mid- to large cap stocks with a solid underpinning in value – as one never wants to see cyclic band suddenly collapse to “near to nil”.
Lastly, and possibly most importantly, I look for emotion or irrational moves downward. I look for evidence of overshooting, i.e., drops that are not well supported by the market-available evidence.
Can you or I get burned? Sure, as always, price swings can happen “on the news” and who knows when the news will break? Perhaps the news that triggered a dip was more spin than substance, more “It isn’t all that bad here in the factory” when in reality the employees – the talent – were all running for the exits.
As always, do you due diligence and consult with your expert investing advisor.