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  • Accounting Red Flags at Microsemi [View article]
    I agree that the momentum players are in. There is no way you can simply enter blindly based on fundamentals. Fundamentals play out over years whereas technicals tell us days and weeks (and are good for entries). This is why I said:

    "A breakdown from its current consolidation would be an entry into this stock for the short side. The risk is that many momentum players are watching this and could push it up even further. Preempting this trade would not be advisable, but a good entry with a tight stop could offer large profits."

    Accounting Red Flags show in earnings eventually though, and the end will come fast.
    Jan 26, 2011. 10:58 AM | Likes Like |Link to Comment
  • Price and Volume Correlation [View article]
    Linear Regressions are a powerful tool. But before we can trust them enough for trading, we have to look at the assumptions of the Linear Model.

    1) The Relation of X (Libor Rate) and Y (ANH) is linear. If their is a non linear relationship, then this will not work. Also with rates and stock price movement, a 10% change in a $2 stock is not the same as a 10% change in a $10 stock as far as actual point change. When a percent relationship may stay the same, but the actual point will differ as size differs, we take the natural log of each regression coefficient and solve for that. In this way we make a non linear relationship linear and can use regression analysis.

    2) X (Libor Rate) is not random

    3) Expected Value of Error Term is 0

    4) Variance of Error Term is same for all Observations

    5) Error term is uncorrelatied across Observations

    6) Error term is normally distributed

    The last three touch on topics of Heteroskedasticity, Serial Correlation, and Multicollinearity (see wikipedia). These issues can be spotted quickly with a scatter plot (why I always like to look at my results visually as well as numerically).

    So when trying to gain confidence in your result, make sure all of your assumptions hold, and this will help. I hope this answers your question.
    Jan 5, 2011. 09:12 AM | 1 Like Like |Link to Comment
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