Stock Bias Test
I was inspired to write this educational piece after listening to the audio interview between Tim Bourquin of Trader Interviews and Brian Shannon of Alphatrends.net, also the author of Technical Analysis Using Multiple Timeframes. Brian’s book starts shipping on June 7, 2008, a book I had the pleasure to read as an advance copy; I definitely recommend his work. I will be posting a complete review of the book within the next week.
- Which stock would you buy below based on the nameless & dateless charts? (listed 1,2,3,4)
- How would you rank them in order of technical characteristics?
- Would you avoid buying of any of the stocks below based on price and volume?
- Would you short any of the stocks below?
Tim mentioned that a couple traders he recently spoke with have written code within their charting software that allows them to strip the company name and ticker symbol off of the charts. I find this absolutely amazing – a tool I would pay for in a heart beat.
These traders do this to avoid the human biases of the companies they are trading. Humans tend to rationalize their thoughts and decisions based on what has happened, what is currently happening and what they think will happen.
For example (one provided in the interview that I agree with): Many traders are starting to talk about a bubble or possible top in oil. Now, I don’t know if oil is topping but I have been avoiding some oil and energy stocks in my own research based on the indicators of my screens. I truly can’t tell you if this is based on the biases of what I have been reading and hearing or the based on my screens dropping clues.
I typically avoid old time blue chip stocks such as GM, IBM and MSFT but maybe I wouldn’t do this if they were making a move and I didn’t know what company I was trading because the ticker symbol was stripped. I did analyze IBM earlier this year but I avoided the write-up for as long as possible because it has underperformed for much of my adult life.
Anyway, take a look at the stock charts below and let us all know (in the comments) which ones you would buy, sell or do nothing. I will post up the full charts with ticker symbols and dates in a couple of days. Some of you may be very surprised to see what stocks they really are and may question your own conclusions once the company names are revealed.
Good luck – let’s see what everyone comes up with (leave them in the comments section). Click through to see charts 2 through 4.
Yes, I understand that fundamental analysis has been stripped of this exercise but I can tell you that the earnings and sales ratings of each stock was within the top 10% of all stocks at the time the chart snapshot was taken.
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Nice…I am assuming that these stocks are from different industries, so I don’t have other peer stock charts to look at.
I would buy a starting position in #2.
I would watch #4, if it holds up its 40d with net gain in coming 2 weeks, I would consider buying it.
Thanks for another good article
I would consider buying #2 if it pulls and holds its 40day MA.Two weeks of sell off came in higher volume.That is a warning sign, but then again bases on chart pattern it happened before and stock always recovered.
#4 is the same. If it holds its 40day and then lands some gains in coming weeks on decent volume.
#1 seems to be in the cup with high handle base. The break out to new highs happened on lower volume. Again i would keep the stock on my watchlist to see how it behaves.
#3 does not look appealing to me.
Based on two comments:
Looks like #2 and #4 are the leading buy candidates.
#3 looks like the dog of the group at this time.
Let’s get some more comments as this blog post is going to be fun!
I wouldn’t buy #1. Even though it has broken through cup-and-handle structure, the breakout had poor volume support.
I wouldn’t buy #2. Two down bars with huge volume is not good. I would wait to see what happens at the 40 period support line.
I wouldn’t buy #3. The current rise has been with poor volume support. Also, and more importantly, it’s having a difficult time of breaking the upper resistance.
Even though not perfect, if I had to buy one, it would be #4. Showing decent support at the 40 period support line. Good battle going on. If I had to buy, I would buy and set a tight stop below the ma line.
I would not buy any right now but if I had to pick here is my order 1, 4, 2, 3.
1. This stock broke out of a cup or cup with high wedging handle at a new high. I would even say that prior to the breakout there is a three weeks tight pattern. Even though volume was lower on the breakout and not perfect there is clear accumulation preceeding the breakout.
4. Despite all the red it is holding strong support at the 40 week line. Notice the last two red candles. Both had huge volume but the stock closed the week in the upper part of it’s range. I would wait for a bounce and buy.
2. There is definite distribution going on here and the last two weeks have been heavy with the stock closing near the lows. There is another high week selloff a few weeks earlier. The only good thing is it looks like the stock may be holing support at the old high of 68.70. Still with all the red no way would I buy.
3. Almost every week of red is on above average volume and higher than every up week. It is also failing at the high on above average volume while closing near the low of the week. Definetly not a buy.
I’m a newbie investor who tends toward value and buy & hold, so I would be cautious to buy any of these near their 52-week highs.
My mediocre technical eyes tell me: buy #4, watch #2 for a bigger pullback, don’t touch #3, and possibly short #1, depending on the balance sheet and such.
I am a newbie to stocks. This is what I would do
1 - I would wait and watch.
2 - Would wait and watch for to see whether it holds 40 MA
3 - Short
4 - Short
I think one thing missing in this test is to specify the time frame; after long or short, how long would we close the positions?
I guess I will buy 1 and short 3 in a two-week time frame.
I’d buy #4 only if it moves above $152.33
I clearly prefer number 1. I would bought it three weeks ago on the break out.
Some criticized the low volume on the break out week. I think that is not so important because there were much accumulation during the last six weeks.
number 2 is dangerous. the chart looks good but the high volume of the last two downweeks is a bad sign. It seems to me the end of the upward trend is near. it is a short candidate.
number 3,4: hold
I like #1 for a buy and a short term hold.
I’d watch #4 for a breakout.
I wouldn’t feel comfortable shorting any of them except maybe #2
Buy #2 and #4
#1s a buy
#2s a hold/neutral, but may setup as a short position. It looks like volume is picking up on the downside
#3 is way too choppy for me to hold long or short.
#4 is a buy if it clears the ~152.50 area. It looks like its put in some near term capitulation @ the 200 day/40 week MA.
THis is a very interesting exercise Chris. I think I might have an opinion that is slightly different then some because I am looking at these charts from an Elliott Wave prospective as well.
#1
This stock has a nice set of higher highs and higher lows, although I would wait for a retracement near the MA.
#2
This stock “looks” like it should be solid, but it also seems to have recently completed 5 waves up and is going down on strong volume, so it would be the one I would most likely SHORT.
#3
Unfortunately, I think I know what stock this one is. In fact, Im willing to bet money that its *****, with the last bar being sometime in Apr 200*. So simply based on that, I would def *** it!
#4
To be honest, this chart is really confusing for me. It looks like it might be starting to break down on high volume, but the last two down days have actually ended up quite a bit higher then the lows of the day, so I would actually be bullish on this on.
****Chris Perruna****Sorry - You guessed the stock so I edited the comment but will put it back after I reveal the full charts in a couple days.**** Nice job - very nice on number 3!
Buy 2 coming back through it’s MA40 … Regular retracement… Love it!
Nice quiz… But I smell a rat .. And a gotcha!
Thx jegan ;-D
Back up the truck on #1…the key is the big price & volume spike from a few weeks prior and the lack of follow-on selling in response.
Buy #3 as again the volume spike shows there is interest…but it is not as strong as #1 due to follow-on selling though that resistance is getting weaker as the price goes up.
Avoid #2 and #4 for now. Place them on your watch list as they might improve in the future.
Excellent comments!!! I love it so keep them coming. Some of you have nailed them and some of you are completely on the wrong side of the track.
Ques: Which stock would you buy below based on the nameless & dateless charts? (listed 1,2,3,4)?
Ans: Buy 1 and 2
Ques: How would you rank them in order of technical characteristics?
Ans: 2 (best), 1, 3 ,4 (worst)
Ques: Would you avoid buying of any of the stocks below based on price and volume?
Ans: Avoid buying 3 and 4
Ques: Would you short any of the stocks below?
Ans: Short 3 when price fall below $80 and short 4 when MA(40) turned flat or down
#4 and possibly #2
[...] how real traders analyze the charts of real companies…gives me a headache, I’ll stick with my frauds, do whatever works best for [...]
1: made & held new high, buy.
2: big volume, wait for retracement nearer to 40MA, then buy
3: maybe a triple top, short play?…but dont like to go contra-trend. Watch.
4: at strong support, buy the bounce
#1 is the strongest buy. The last candle on #1 sets the high of the chart, therefore it’s moving into uncharted terrritory with no overhead sellers. Also, the last dip down to the 40-period line was on low and decreasing volume, thus few sellers there. Then it spiked off the 40-period MA with strong volume. Then it continued the uptrend for 5 candles.
#3 would be my second strongest buy for similar reasons, but I’d like to see what the next few candles do.
#2 & #4 I would leave alone because of the heavy selling volume on the last dips. But I wouldn’t short them because they are still above the 40-day MA.
Purely academic test. Real world makes reading technicals much easier. Anyway, 2 right off support, however, watch closely for pullback to MA depending on news & what the rest of the market does, volume is huge factor here; 3 not a buy as shown, made double top; 4 best buy choice; 1 could be buy for very short term, but watch for pullback to MA. So, when will answers be posted and what’s the prize?
Mondo,
Not sure where you are going with the first two statements.
But I will say (and this is a hint for everyone) - you are completely wrong with your analysis on all 4.
Yes this exercise was mostly for fun but it does have a great educational value. No prizes but I will look to give out a prize when I do this again in the future. A stock market book of some sort.
More hints for everyone:
Alex - I don’t know if you figured out what stocks these are but your analysis is absolutely EXCELLENT! Nice job - very nice job.
I will post up the answers **Tuesday**.
Thanx for such a quick reply. I need the book, obviously. Maybe I’ll win it next contest.
I am a novice trader and this is the first blog that I am writing to. Always wanted to say this so I will say it now. Chris is doing an excellent job with his blog. This is the only blog that I regularly visit. First because this blog is full of free priceless knowledge for a starting investor like me, second I am very comfortable with the CANSLIM trading philosophy that Chris talks about in his blogs.
Having said that here is my observation:
1: I would buy #1 even though volume is low when the stock broke out from cup with handle base. Ideal entry point should have been around $130, so this stock is slightly extended past the buy point.
2: Will not touch it. Distribution volume too high, last two weeks. Will wait and see if it bounces off the 40 day MA with high volume.
3: Will wait and see, and might buy it if it breaks out above 97.80 on high volume.
4: Will wait and definitely buy if it breaks out above 152.23 on high volume. Essentially bouncing off the 40 day moving average with high volume.
I do not short stocks so have no comment regarding that. Some day I might. As always thanks again for all your help, Chris.
If we are talking this market, none of these are buys…even #1, the better of the 4 hit a high with pathetic volume.
Nice test though. Stay cool
Yeah I agree with Alex and his analysis as well. My only reservation is that I’m not seeing any convincing accumulation.
Exactly the same as Craig.
1: made & held new high, buy.
2: big volume, wait for retracement nearer to 40MA, then buy
3: maybe a triple top, short play?…but dont like to go contra-trend. Watch.
4: at strong support, buy the bounce
While the exercise is based upon price & volume alone or techincal aspects, for the record I wouldn’t move into a position unless I can see at least:
1) Risk-to-Reward.
2) RS Strength
3) Industry Group/Sister Stock Information
4) Fundamentals on Ownership
5) Overall Market Direction Factor
But, if I had to make a decision:
Number 1 - Too extended from the 40 MA. I would need it to come back closer in for a buy. Overall looks good - just need a proper buy point for protection. Has a good long term trend.
Number 2 - Large sell on above average volume (red flag #1)
Number 3- Too choppy to consider - need to see a more defined pattern.
Number 4- If I look at this from 152 with retrace back to 170 resistance, the most I can count on is 1.5 R or 11.84% - not worth it to me for the risk.
Some famous investor said to buy a stock that goes up. If it don’t go up, don’t buy it.
#1 I’d buy if support was shown on an intraday basis - on the 30 and 60 min charts. I’d especially pay attention to how it reacted compared to the overall market, i.e. if it holds up well while the general market is going down or sideways on the intraday basis then it’s a definite buy. If it’s showing weakness along with the market or more than the market then on the intraday charts… then stay on the side lines. My preferred buy in point would have been 3 weeks ago on the breakout from the 2 weeks of consolidation.
#2 I’d short if the current support line is broken, and the intraday 30/60 min charts show as much or more weakness than the overall market. I’d keep a tight leash on this position, probably exit at first opportunity.
I don’t believe I’d touch #3 or #4 as I’d feel like I was trying to pick the top or bottom respectively.
I think it is odd that no one is tremendously bullish on #3. I like the consolidation and break.
#4 looks good too - lot of volume on every bottom.
Note to moderator - I typed up that last comment like I was half in the bag - can you reject it and post this instead please?
Based on those charts, I wouldn’t buy any of them.
#1 looks ready to roll over, it is making new highs on low volume after a long advance
#2 is dropping on huge volume, recently reversed off a new high
#3 is forming a nice little cup, but there is no volume in the up weeks
#4 is ugly too, big volume selling recently
I’m sure some of these ended up being great buys, but based on what is shown in the current charts I wouldn’t go near any of them
I like #1, being accumulated, holding price, no resistance. I don’t really like the others. Maybe #2 if some volume on a bounce off the 40 day average.
Using stops at 6%
[...] ran a post on Friday titled, Stock Bias Test, which has become one of the more popular pages on my site in only a few days. My site doesn’t [...]
Buy: 1-3-4
short: 2