Beware of the rationalization trap in the stock market. Investors who try to rationalize the unexpected behavior of a stock put themselves in a position of increased risk. The simple fact is that you may never know why a stock is moving in one direction or another, but watching the stock’s price and volume relationship will normally keep you on the right track. That’s why the chart is so critical.

 

There are countless examples of companies with outstanding earnings and promising products who just fail to perform well in the market. Don’t always feel like you need to know ‘the why’. Always try and find companies with a good story, product, management etc. But if the reason is not yet known, don’t wait for one. The reasons may not be public knowledge for weeks, months or ever. However, the charts are never late and they never lie.

 

Remember Yahoo in 2000-2001? This is a classic example of why charts are so important and why you can’t get caught trying to rationalizing a stock. Yahoo’s stock price peaked when its story was strongest, a full 4 quarters of decline before earnings topped out. For those who waited for the fundamentals to change, they would have sold at the absolute bottom, 97% from the top. The moral of the story is never let the fundamental story overshadow the technical indicators. Concentrate your research on stocks with strong fundamentals and technicals. Most of all look to the charts for the timing of both your buys and sells.

 

Best Returns,

 

Your MarketSmith Education Team