As you know, in traded securities, it’s always Opposite Day, at least if you’re doing it right. Everyone around you all jazzed about stock A or bond B? Hurry to your screen and sell it. Friends and colleagues given up on stock C or option D ever making a move up ever again? Quick - load the Super Duty!
For those of us who like to invest like we’re dead inside, who like to measure emotion rather than engage in it, a handy tool is at the ready. It’s called the Fibonacci series. No, don’t click on a more interesting thing over there. You don’t need to lose any belly fat. Stick with this one old trick right here. It’s really not difficult, and it might prove useful.
A million places that aren’t this newsletter can tell you what the Fibonacci series is. Investopedia is always a good place to check up on definitions thus enabling you to style it out when next pressed on the question. You can find a note of theirs on Fibs here
. It’s mercifully short and worth reading.
Now that you are a bar-stool expert on Fibs, we can cut to the chase. The Trough of Despair, the Pit of Doom, the Abyss Of All Things Once Good Now Fallen Into Disrepute? You don’t need to emote or feel it. Because you can measure it. It’s called a 0.786 retracement. Specifically that means that your security of choice has given up nearly 80% of all the gains it chalked up in its last up-move. In other words, folks have all but given up on this loser. Sounds bad. Until you think, hm, put Opposite Day hat on. This must mean that almost everyone who wants to sell it has finished selling it. And that could mean there is a shortage of supply for those miscreants who may want to buy it. And - now just a moment, what was it in Economics 101? Oh - that’s right - short supply, increasing demand, means … higher prices! And what happens when a security starts moving up? Other folks pile on. (Which leads to the Height of Elation - we’ll deal with that in our next issue. For now keep focused on Despair).
Now, to take advantage of this emotometric chicanery, get yourself signed up to a free (or, if you dislike your money and want to share it around, paid) membership of whichever charting tool you prefer. TradingView
work well for retracements. The tool is built in, you don’t need to calculate anything, just drag the icon and the site does the rest. And then go hunting. 0.786 hunting. When you learn to spot them, you keep spotting them. Here at Cestrian Towers we are this close
to being able to spot them with the naked eye at 100 paces. You think we’re joking? We’re not joking. We can also call a 0.618 from across the room but that’s another story for another day, if you can bear the suspense.
Anyhoo. Here’s a couple examples. You know the End of the World that happened in the market when Covid first hit? Securities fell off of the edge of the planet until they were caught by the we’re-doing-it-for-the-American-People-it’s-definitely-not-our-own-brokerage-account-meltdown-we-have-in-mind-here unholy alliance of Messrs. Powell, Trump, Pelosi and others? Well, we have news. It wasn’t the end of the world. It was just a 0.786. And if you see a 0.786, your presumption should be, aha, Buy. (Do more work of course. Prove it out. But your starting assumption, before you prove yourself wrong? 7-8-6 = B-U-Y).
Here’s that apparently apocalyptic drop in $SPY (fullsize chart here