Monday, December 11, 2006

Buy and Hold - with a Twist.

I am a firm believer of technical analysis. There’s so much volatility in the markets these days, that to believe that the markets are not moving based on traders is just being ignorant. How can a company be traded solely on fundamentals, when new earnings data comes out every quarter – the price doesn’t stay stagnant as investors wait for the next period to be released! Besides news, traders are causing this flurry of price fluctuations. Thus, in order to capitalize on the opportunities that are present, you must have a little savoir-faire when it comes to understanding technical analysis.

Over the long run, (and maybe I’m just a dreamer), but I know the markets have to go up. Sure, there will be periods of times of bearish pullbacks, or even a bear market – but over the years, the markets will continue going up. It has to. The system is based on capitalism – markets are based on companies, and companies will continue to improve their business to accommodate for changes in economy. It’s just cyclic.

Thus, if you are a long term investor, you have two battles to front: you must be able to watch your eggs during these bearish times (when you need technicals the most), but maintain a firm fundamental understanding of what’s going on within the shell of your egg. You can know everything about price patterns, support and resistances, candlestick patterns – but what an oscillator cannot uncover is the push of management.

There are good companies out there that are getting beaten down because of traders. Any true investor knows that equilibrium must be maintained, and those undervalued stocks are poised to go up (and vice versa).

So, why not be a “Buy and Hold” type of investor but with a twist? Buy the good companies, and understand the technicals to capitalize during bearish periods? I’m not talking about day trading, or selling short – I’m talking about taking advantage of overbought situations where everything has to return back to the mean.

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