Friday, August 17, 2007

Profiting From Losses

If you thought that the level of volatility was out of control for the Dow and S&P, you should have a look at the Canadian markets if you have not done so. Yesterday, I got stopped out of all my positions on the opening. The TSX in Toronto was down about 200 points at this time, but a few hours later it was down nearly 600 points.

If you think that sounds bad, the Venture Exchange, in Vancouver, which trades mainly smaller capitalization mining stocks, has lost almost 30% of its value in the past couple of weeks:

I did in fact start shorting stocks starting July 23, and made some nice profits, but I made the costly error of covering my shorts, and then a couple of days later going long. The root cause of this error was overreacting to potential reversal signs, and not waiting for confirmation.

For example, in a previous post, I observed the perfectly shaped hammer that had formed in the TSX chart. Now, there is nothing wrong with doing this, but I should have been more cautious, and I should have waited for confirmation the next day, which never came.

Incidentally, the same scenario appeared in the charts yesterday, except in the Diamonds ETF. A text-book hammer formed right on the 200 day moving average. This is a bullish combination, however, I would not jump the gun and dive in. Let's wait for some confirmation this time:

I hope that you can learn when my analysis turns out to be correct, and when it turns out to be incorrect. I also benefit greatly from this site, since I can go back, and see exactly what I was thinking several weeks ago, which helps me learn from what I did right and what I did wrong. I think this is a win-win situation.

Finally, here is a daily chart of the US Dollar Index:

I'll let you be the judge, but the main thing I noticed is that the currency is right on R2, which I labeled on this chart about a month ago. As well, notice that the Dollar is entering overbought territory. I'm still going to wait in cash for a bit longer though, since I still want to see more confirmation that the USD will bounce off this line. Good luck investing.



You have a great site--you keep it current and interesting. Don't beat yourself up about being stopped out--congratulate yourself for using stops correctly. When we get our next gold stock trade you will profit.

HeadlineCharts said...

hi, I'm really not certain what is up with gold shares. I'm tempted to reduce my gold shares into any strength. I'm thinking that if the US Dollar were headed lower the gold shares would be hinting at it by now by heading higher. But this market is so crazy right now that people are selling everything.