Smarty_Pants

Is the U.S. Consumer Really Dead?

Chris B and CautiousInvestor:

What you say is true, consumers will be retrenching for quite a long time and this will impact earnings in this sector for the forseeable future. But there's more than one way to skin a cat in the market.

For as long as humans have had financial markets people have been making money by a number of different approaches. Doc is obviously a trader, looking to make a good return in a short timeframe with as little risk as possible.

"Zig-zags" on a chart are nothing more than an historical record of past prices, which themselves represent the perceived values of those who actually made the trades. Again, history has shown that there is a statistically favorable opportunity here in the short term.

Somebody is buying these stocks at higher prices since the chart bottomed. Who knows why? Who cares? For the short term, the perception of market participants is favorable in this sector as the rising prices demonstrate.

That doesn't mean a rally to all time highs is imminent, but it doesn't rule out the possibility either. Doc is merely pointing out that this is a chance to take advantage of the current perceptions which are driving people to buy.

She has given a reasonable target to exit the trade. Essentially she is saying that she's willing to bet some amount of money that the price will go up in the near term because she thinks the odds are sufficiently in her favor.

If she believes her mathematical expectation is sufficiently positive, then it's a good trading opportunity and worth pursuing provided you keep an eye on it to limit losses if the trade sours.

It's just a different approach to profiting in the markets. Believe it or not, Van K. Tharp has shown in his book that you can make profits with random trading signals if your money controls are good. He did an extensive test across many markets with a very simple trading system and it actually made money by randomly going long or short (50/50) every time his exit stop was triggered.

See "Trading your way to Financial Freedom" for details. It's an excellent book to read if you trade the markets.

Doc is simply using 'zig zags' as a way to improve her odds on the trade from 50/50 to something better, like 70/30. If you make a bazillion small trades with 70/30 odds of profit you will net 0.4 bazillion winning trades over the long term and profit, even if this trade loses money.

You will come out ahead as long as you don't bet so much that you go broke on any one trade.