This is how you know the stock market is going to say goodbye

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Predicting the right time to buy stocks in the stock market is of great benefit. This makes it possible to invest early and take advantage of increased prices. But knowing the ideal time to sell a stock is even better. In investing psychology, the pain of losing is greater than the satisfaction of winning. In the stock market, everyone dreams of selling when the stock price peaks.

The timing of the market becomes even more important when investing in speculative securities whose price is like a boat in a stormy sea. Take Texas video game company GameStop, for example: if you had purchased ten shares of GameStop for $44.2 on January 8, 2021, you would have had a price increase of 1738 percent… Assuming you bought it exactly three weeks later. Sold January 29, 2021 January.

On the other hand, consider an investor who did not sell 10 shares, which were worth $812.5 at the time. Excited by such a rapid rise, he could have added 100 shares at $8125 on Jan 29, held on throughout the downtrend and didn’t sell until Feb 14. It would have lost $6,156, or 75.8 percent, in securities purchased on Jan. He would earn 345 percent with the papers he received on January 8th. However, these represented only a small amount on the day of purchase, capping his absolute profit at $156. Overall, our investor, who felt very happy at the height of the bubble and did not consider selling, lost $6,000.

An experienced trader faced with these parabolas (exponential increases) sees the momentum and becomes uncomfortable. The pace of the rise should keep the trader on the alert. Such courses cannot stabilize smoothly. Of course, when you get off and continue climbing, you will feel like you jumped off the moving train too early and eg. B. to miss another 20 to 30 percent increase. It’s hard to guess where the parabola ends. But if the investor misses the top, the situation is even worse: it goes downhill fast. Sales have to go fast because in an accident every minute counts. Too often it is too late.

Therefore, exiting on time is a gamble. This is mainly because the investment advisory industry recommends buying ideas rather than selling ideas. After all, it’s better for investment professionals to be paid for their clients’ stock purchases or mutual fund subscriptions than for them to make a profit. The trader must therefore develop his own tips and identify sell signals.

Technical Analysis: A prophecy with benefits

In situations where it is difficult to predict individual stock prices, technical analysis, also known as chart analysis or charting, can provide guidance. It defines support levels (a floor below which the price cannot fall) and resistance levels (a ceiling that the price cannot exceed) that can help the trader make a decision.

“Technical analysis offers a wide variety of tools for identifying sell signals,” says Bruno Estier, a Geneva-based technical analyst and many years instructor in the field. The best known of these signals are the long-term moving averages, eg. B. More than 200 trading days. This is the average price of a smoothed stock over that period. “We expect the market to rise while prices are above a rising moving average. We have confirmed that an uptrend turns into a downtrend when prices break below the moving average and point itself down. It’s a sell signal.”

Bruno Estier cites other later signals: “You’re getting a price correction for a shorter period of time, for example the 20-day moving average. If it falls, then crosses the 200-day moving average and falls below it, it continues to rise, which is another sell signal.

Another technique is to identify the trading band where a price fluctuates: it’s a zigzag corridor where price zigzags. “Instruments have been developed that calculate how close you are to the top or bottom of the region as a percentage, taking into account bandwidth. The sell signal is given by a high percentage at the upper end. ”

Another less mathematical and more psychological sign that Bruno Estier believes to be sound is the differences between price and momentum (velocity). For example, a stock reaches its first price peak, then a second, and then a third. At the third peak, the momentum, that is, the speed of reaching that peak, slowed down compared to the second peak. So there is a discrepancy between price and speed. This indicates a trend reversal where the price curve should point down.

Head and Shoulder Model

Technical analysis also includes famous patterns such as the “head and shoulders” pattern: when a price makes the first peak (left shoulder), then the second peak (head), followed by a third lower peak (right shoulder) and below the line connecting the valleys between the peaks when the price makes it. If it goes down, it’s a sell signal.

Technical analysis shows whether a trader is in an uptrend or a downtrend. In the first case, the investor should buy when prices are falling (bottoms). In the latter case, the investor should reduce his portfolio on the rise.

Fundamental analysis: the impact of inflation, laws and geopolitics

Macroeconomic variables such as growth, inflation and interest rates, as well as new laws or geopolitical developments, also give trading signals. For example, it was easy for oil traders to predict price increases (buy signals) at the start of the Covid crisis and the war in Ukraine.

An important example of a sell signal is inflation. More specifically, when officials started talking about the return of price increases from November 2020. From 2021, the inflation rate in the eurozone should suddenly rise from 0 percent to 5 percent. In the inflationary effects of the Covid crisis, alarm bells were ringing for every investor in the stock market or cryptocurrencies. The goal was to mitigate the riskiest risks, sell in the event of a setback, and make a profit. An increase in inflation is a harbinger of interest rate hikes.

In an environment where interest rates have remained low for years, the impact will be even greater as market participants leverage heavily and benefit from the long zero-interest rate regime. Therefore, rate increases often cause speculative bubbles to burst (because traders have an incentive to quickly reduce their debt). It falls when large amounts of debt flow through the exchanges. Inflation leads to rising interest rates and the deflating of the stock bubble.

As a particularly speculative asset, Bitcoin should have been sold within three months of inflation announcements, i.e. by February 2021. It had an initial 50 percent crash between March and July 2021, and another 70 percent crash from November 2021 to late 2022. Likewise, the Nasdaq fell 30 percent through November 2021 and the next six months. Interest rates actually started to rise in the US in March 2022 and in the Eurozone in July 2022. It was their expectations that deflated the stock bubble. When the first rate hike came in the US in March 2022, Bitcoin had already lost 40 percent and the Nasdaq 23 percent since its peak in November 2021.

The right timing belongs to vigilant investors who closely monitor key macroeconomic factors and can resort to technical analysis. These indicators keep traders alert at the height of enthusiasm, preventing them from rising and warning them of a timely exit.

This article was originally published on the Blick-Romandie website.

Source :Blick