Fear and greed are as old as the Garden of Eden. For many market participants, these are crippling emotions, often causing individuals to sell and buy at the wrong time. The market is extremely good at triggering these emotions, which can be valuable for survival, but detrimental when trying to make money in the market. Over the past two trading sessions, the U.S. Tech Sector has dropped in price. Some would call this price discovery, while others, such as our friends in the financial media, have dubbed it, "the tech tumble." Alliteration always amuses (See what I did there?). It's almost as if the financial media was in the business of entertainment. For sure, they're not here to help us.
"Investing isn't about beating others at their game. It's about controlling yourself at your own game." ~Jason Zweig
If the financial media is not interested in helping us but prefers to trigger emotions just to increase viewership, then it's likely in our best interest to turn off the TV and stop getting hooked by click-bait headlines. But what can we use to fill the void? Where can we get unsensational, fact-based, and objective information? It's called PRICE. We know… that's not a very sexy answer. But it's the truth. Price is factual data which reflects the interaction of supply and demand based on economic law (not theory). Price is objective and doesn't care about your opinion nor mine. Even if you disagree with it, price doesn't lie (some really hate this and fight with the market). The fact-based nature of price is exactly why we use it to identify opportunity in the marketplace. Let's take a look at the price of Technology, using ETF XLK, to help us.
As you may recall, we use a simple technique to helps us make better trade decisions. When we look left on the daily chart of technology above, even after the recent price correction, price is still making a series of higher highs and higher lows, which is indicative of an ongoing uptrend. In fact, we notice sideways movement and drawdowns ranging from -2% to -4% are a natural part of trend progression. However, this is difficult to handle if we respond to gains and losses emotionally. Loss aversion is a real and present danger to many portfolios. Here's a visual of this common emotional experience.
Many market participants experiencing twice as much pain during drawdowns than the joy experienced during equivalent gains. Not helping matters, and many times feeding the negative response, is the inundation of sensational media opinions during times of drawdown. TV Networks and Financials websites are touting "Tech Tumble" even though price is working well within the characteristics of an ongoing uptrend. This sensationalism is extremely unhelpful to market participants who need to manage (or better yet, remove) emotions during the investment decision making process.
As market participants, we don't need to predict (media pundits will play this game, we don't have to). We need a plan. We need to know when we're wrong, which is the beauty of studying supply and demand via price. Using the daily chart above, we can see price moving in a sequence of equivalent higher highs and higher lows. These levels give us important clues on where previous battles between supply and demand have taken place. And this particular sequence has established a nice upward momentum channel (annotated in green). The first clue this trend in Technology is changing would be a breach of the lower green trendline on a daily closing basis. If/when price would close and hold below the lower momentum trendline, it would indicate a shift in the demand/supply dynamic with sellers able to change the trajectory of price. Secondly, and more importantly, a closing price below 54.30 would likely usher in price discovery towards the 52-53.50 level. And if that can't hold, a much larger correction is upon us and the media aggrandizement would be at a fevered pitch, providing another excellent opportunity down the road.
For us, this one is pretty simple. A breach of the lower green trendline would be a warning and a close below 54.30 would indicate we're wrong on XLK. Someone else can have it. Above these levels, the trend remains your friend.
Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.
Disclosure: I am/we are long XLK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.