Could consistent alpha be a fine blend of investment styles, value investing, buying robust companies on the cheap, in other words, identifying the bottom with technical analysis?
Classic investor Warren Buffett famously said, “be fearful when others are greedy and greedy when others are fearful”. So, it’s the latter, which might explain why underperforming value stocks are currently being bought by the market.
“underperforming value stocks are currently being bought by the market”
But buying a value stock that keeps losing value is like catching a falling knife. What’s more, if you are trading/investing using leverage, you risk being stopped out of a good investment in the short term with huge losses. That very same investment could be equally, if not more profitable if it were held over a medium-long time frame.
We are not great fans of leveraged trading, unless you are in the elite rigging club, because you need to be able to time the market to near perfection and there are six reasons why market timing is for suckers.
Identifying the bottom of a stock price with technical analysis is better than just taking random trades
So identifying the bottom of a stock price with technical analysis could help investors/traders to determine the optimum price, the very bottom which is the ideal price that you want to fill your boots.
“Identifying the bottom of a stock price with technical analysis is better than just taking random trades”
Market volume data can be useful in determining the bottom price
Quoting a quote self-made billionaire investor Leon Cooperman recently said, “Bull markets are born in pessimism; they grow in skepticism and they mature in optimism and they die in euphoria”.
So, peak pessimism, when trading volumes are high with stockholders scrambling for the exit in a state of hysterical panic is often seen as an early indication that the bear cycle has matured and the seeds of a bull market are being planted.
Think about it. When all the leverage traders on margin calls have had their positions liquidated, when those investors that don’t have a gambler’s constitution can’t stomach. or afford more losses throw the towel in there are no more sellers left.
A price floor is being laid, volume is low, prices start picking up, fear gives way to greed, then FOMO triggers a wild orgy of buying as trading volumes hit all-time highs.
“The relative strength index (RSI) combined with price/trading volumes can also be useful in identifying the bottom with technical analysis” – Win Investing
When identifying the bottom with technical analysis keep an eye on trading volumes
When the stock price collapses on high volumes, then stabilize into a walking platform that could be signaling a bottom. Moreover, if trade buy volumes pick up from there due to capital flows that could be an early indication of the beginning of a new bull market.
The relative strength index (RSI) combined with price/trading volumes can also be useful in identifying the bottom with technical analysis
The RSI measures the velocity and magnitude of price movements. So, stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative change.
RSI is measured on a scale from 0 to 100, with high and low levels marked at 70 and 30.