Tuesday, November 24, 2009

Strength is the key

The HK market was down more than 300 pts today following the big sell-off in China. The government is requiring the banks to increase their capital requirements; thus, speculation arose that these companies would have to place shares at deep discounts. With that news, the Shanghai Composite crashed from up 20+ pts to down 110+ pts.

The good news is, I survived. Luckily, I was able to gain about 5% from my investment in Brilliance Auto. Plus, I didn't get hit much in the afternoon because I was holding a defensive stock (HK:371) which was unusually strong today. I'm hoping that its strength will persist until tomorrow.

For the past few weeks now, I've been making money in down days and losing money in up days. I thought it was kind of weird at first, but upon further reflection, I realized that the reason for this anomaly is very logical. During down days, right off the open, it's stark clear to everyone which stocks have innate strength that even a tumbling index could not dissipate. However, during up days, it's not so clear which issues are strong enough to climb further within the day.

Thus, the lesson of the day is: if you're long the market, always look for strength. The ADX indicator (measures momentum) is your cheating. The higher it is (preferably above 35), the higher your chances of surviving a weak market. For example, as you can see in the image below, the stock I held today has been very strong. Its ADX is 50 (the black line), and it's above all the moving averages (also a sign of strength).

No comments:

Post a Comment