IX. Ejecución
IX.4 Estudio y evaluación del Sistema de Control Interno
J
ohn Greeley was the person responsible for giving me my first job as a technical analyst. He handed an armful of books to me one day and said to read them and we would talk. At the time I was working for F.I. DuPont & Co. and the books were all the leading texts of the time: Technical Analysis of Stock Trends by Edwards and McGree, a few of Joe Granville books, William Jiler’s book How Charts Can Help You in the Stock Market, and Alexander Wheelan’s work Study Helps in Point and Figure Technique. These were the books that started my education and introduced the various techniques of technical analysis to me. To this day they would still be some of the first authors I would recommend to anyone eager to join the technical ranks. All of those volumes, and many more, are on my bookshelves and are referred to on a regular basis even today. One of the texts, en- titled Wiped Out, however, had a profound impact upon me. I was young and could relate to the author’s mistakes.I remember the book had a yellow cover and large black print. It was a story of a young man who had inherited a good sum of money at the market low in 1962 and by the top in 1966, he was Wiped Out. He said on the book’s jacket that all he was trying to do with his book was to recover some of his losses. But there was a quote that I have always kept with me, and I want to pass it on to you. At the time it answered many questions about investing or trading
That one phrase has stayed with me longer then most words of wisdom that I have picked up over the years.
One major way of avoiding being wiped out in the stock market is to recognize the trend of the market. Knowing which direction the market is moving is vital if you are planning to be investing or trading for any length of time. That might sound a little simplistic and trite, but believe me, more money has been lost by people thinking that a market should be doing what they think rather than what it is actually doing. Here comes another Brooksism: “The market is never wrong: it’s you.” If you learn nothing else in this book, learn that fact.
In their pursuit of excellence in the marketplace, I have seen the great and the near great get taken out behind the wood- shed and never heard from again. The idea that you have a bet- ter mousetrap or a superior market indicator other than what the market itself is telling you is almost laughable. It would be a great source of humor if it weren’t sad to see someone lose it all because they felt they were smarter than the market. If you spend any time in the financial marketplace, you will run across people who will make all sorts of outlandish claims about “their method” of trading/investing. To be fair you should at least look at many of these approaches. That just goes with the territory. It makes no difference where outrageous promises of great wealth come from, a brokerage house or a market letter writer. As soon as someone starts telling you things that make no sense to you, run, don’t walk, to the nearest exit.
All of the markets are based on supply and demand. The aggressiveness of the buyers and the sellers and the perception that those forces have on the investing public is what we need to follow. This touches on the subject of “top down” analysis, which I’ll cover in a later chapter. For now let us simply use the stock market for our examples.
TRENDS
The elements that make up a stock’s trend are obviously price and time. If you were to look at any chart of a financial instru- ment, it wouldn’t take you long to realize that stocks do not travel in a straight line from point A to point B. Even if the
investors believe that a market or a particular stock is under- valued, we never see an immediate leap up to a point that is considered fairly valued. Their movements are stair-step in na- ture. As the stock moves higher, some people are willing to ac- cept a small profit and sell to the buyers, while others choose to hold in the hopes of higher profits. Although the reasons are varied, the results are always the same, and what we end up with is a series of highs and lows over a given period of time. In studying trends, the direction makes little difference, as the results are the same for both sides. The longer a stock remains in a trend, the more important that trend becomes. Of course, any instrument—bonds, stocks, commodities, currencies, etc.— can travel either up, down, or sideways, and that’s about the extent of their dexterity. So let’s look at some definitions to aid us in a study of trends.
REFRESHER
I want to make sure that we understand the terminology. The terms support and resistance are given to price levels where the forces of supply and demand have come into equilibrium. Remember, a price will remain in the direction it’s moving un- til a greater opposite force halts it progress. At that point we will see the price trend stop and often reverse. The upside is called resistance and represents a point where supply is suffi- cient to halt a price movement and cause at least a temporary decline. Once a decline has started, it will remain in that trend until the price is low enough to attract enough buyers to ab- sorb the supply and halt the decline. That price level is called support. It is the position of these supports and resistances that make the patterns and the trends. The more times a re- sistance point or a support level, is tested the more important and reliable it becomes.
An uptrend is a series of higher-price highs and higher- price lows. What defines the uptrend is the pullback after the first upward move. The low point of that pullback must be above the previous low, and there must be a subsequent new high point reached in order to start an uptrend. This is very basic but is part of the bedrock of technical analysis.
A downtrend would be just the opposite. Here we would have a stock registering a series of lower-price highs and lower lows. The same type of experience will be found in downtrends. This trend direction will remain in play until an opposing force can be mustered to halt the series of new lows.
A neutral trend would be a trendless market. Prices es- tablish an upper limit that is called resistance that match each rally attempt. Lower limits called support match each preced- ing low. This represents a market either reversing its long-term trend by making a top or a bottom, or a consolidating pattern to catch its breath after a strong move before continuing in its primary trend. (See Figure 5-1.)
All three patterns have their importance in our work, as they tend to give us entry points in a market. It’s fine to say I think the market is headed lower because of my economic out- look. But unless you’re planning to pull all of your money out of the market and into a piggy bank, you’re going to have to learn where and when to buy and sell. Like stocks, markets don’t
F I G U R E 5 - 1
usually simply collapse. They tend to rotate lower, and by fol- lowing the trends of the sectors and groups, you can very often navigate around hard times and capitalize on the good ones. I believe the only market that I remember having very few places to hide was the last few months of the 1974 nosedive. Trend lines can give us the information we need as to where stocks have re- versed before and where they are headed. Remember, even a neutral pattern can be quite profitable if the spread between the high and the low is wide enough. A stock that swings back and forth in a 20 range can be valuable even if the stock itself has no progress of its own. Knowing where a support or a resistance area can be expected is a major tool in our business. It can be the difference between having a target to guide you or not. Pic- ture yourself at sea in your boat and having the choice of know- ing where the next harbor is or sailing blind. Trends give us boundaries that can be turned into profits.