The following scenario is putting myself in the shoes of a friend, who would like to see how I manage and make investment decision based on the current stocks he has, and stocks he is interested to purchase. This is not an advisory write up.
As an investment knowledge coach, it is not my policy to give advice, but to share the rationale and the disciplined use of technical analysis for those who believe in the educational value of the investment strategy and approach.
This friend of mine works in an US electronic company and he is familiar with the
mechanics of the industry he is in.
Currently he has some stocks in KOMG, with today price at US $ 18.50. He hopes the price will rise to US $ 24.00 by March / April 2005, i.e. 3-4 months from now, assuming he would like to sell at US $ 24.0 for a good profit.
He is also interested to purchase some MXO or WDC. He believes MXO will recover within 1 year - with high return but risky.
In the case of KOMG, he has a target price of US $24.00 in the next 3-4 months.
In the case of MXO, he believes it will recover within 1 year, though he did not state his price objective or expectation.
we assume that he has done his homework (whatever that maybe, fundamental analysis, or simply being an industry player etc. for his expectation of the price movement).
I will now apply technical analysis and state my own rationale and investment strategies and approach based on the above given background.
On KOMG
With the price objective of US $ 24.00 in 3-4 months time, I assume that US $ 24.00 is a profitable target with whatever maybe the cost price purchased and that 3-4 months is a reasonable timeframe to wait. (i.e. it is no longer attractive an investment if US $ 24.00 is achieved in 5-6 years).
I will not go into the details of the application of technical analysis, which is given in my
internet TA tuition class
. But I will state the strategies and approach for the investment decision making.
| Figure 1 - KOMAG stock graph from July 2003
to Dec. 2004.
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Figure 1 KOMAG
July 2003, KOMAG moved from about US $ 3.00 to US 24.00 in one year,
700% rise. With the target price of US $24.0 in the next 3-4 months from
today, my friend's expectation is that KOMAG is to re-establish its previous high of US $24.0. Whatever maybe the reasons for such an expectation, we need to explore a few scenarios e.g. what does it take, with what pattern and price movement can such price target US $ 24.0 to be achieved, and what if such price movement fails, what should be the investment
decision then?
| Figure 2 - KOMAG stock graph showing possible
price movement
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| Figure 3 - KOMAG stock graph with Fibonacci
retracement applied
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Figures 2, and 3 show that if the price moves along the upward trendlines as indicated, price of US $ 24.00 could be achieved in April 2005. But the assumption is that the trendlines is stable and the price can move up and down within the channel. Then this channel trendlines become an important framework or guides for us to monitor closely.
We take a closer look again at Figure 2, what if the price drops below the lower trendline or support, to say US $16-18, what should be then the investment decision?
As a disciplined Technical Analysis practitioner, one should admit and accept the fact that the assumption of price realization to US $24.0 in 3-4 months is unlikely to occur. With the price drops to US $16.0 from today US $ 18.5, there is already a loss of 13.5%. And the price may drop to below US $16.0 Hence the investor should plan and decide whether US $16.0 is the cut loss
point or take profit point (if the cost price was low).
If there is still the belief that the price will return to US 24.0 in different timeframe, i.e. not in the next few months, one should consider selling the stock at cut loss point or higher to take profit and invest the money in a different investment instrument which can give modest consistent return (like what I am currently doing now, see
investment
performance with fairly consistent and modest return) and wait till KOMAG price is depressed enough
to purchase for spring up to US $24.0.
On MXO - Maxtor Corp.
There is an expectation that this stock will recover within one year,
though currently the performance is poor.
| Figure 4 - MXO Maxtor Corp stock graph from
May 2002 to todate.
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Figure 4, shows that there is no technical evidence for a stable base
formed yet, which is necessary for the spring up to higher price to occur. Not until a good and stable base of low prices is formed, I will not invest in MXO
for the time being, but will park the money first in the investment instrument that currently gives me good positive consistent modest
return as per investment
performance mentioned earlier.
Summary of Investment Strategy
- Start with whatever maybe the
investment criteria (fundamental analysis, rumor, knowledge of the
industry etc.) Technical Analysis is used to check against the
target price and TIMING.
- Investor should be clear about
his or her price target and timeframe for a profit to be realized.
- While expectation is on making
a good profit, one must be constantly be alert to protect his or her
own capital with stop loss measure or profit taking decision point.
- Use Technical Analysis to plan
and strategize on the above.
- With the plan and homework
done, the rest is monitoring and execution in accordance to the plan
with discipline and commitment. (This is the discipline most
investors fail to do.)
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