[ANALYSIS] How much ‘entry plays’ you need to succeed in your trade

We normally assume that entry, otherwise called as market timing, is very important because it is the first step in the cycle of a trade.     

Indeed, anything that contributes to a successful trade is important. However, how truly important is it when compared to the other factors in the trading equation?  

This question – and the answer to it – seems to be highly relevant under the present market situation.  Brokerage houses continue to issue trading calls to “trade cautiously.” In particular, they are recommending to buy when the market gets back above its 6,600-resistance level.  

Nitpickers, on the other hand, insist on buying right now. The market is near the breakout level of 6,600.  Their rationale is you make more money when the market actually breaks out.  

To be precise, the market has been lingering several points below the 6,600-resistance level in the last seven weeks or so. To recall, the 6,600-resistance level was breached for the first time on April 28.  Since then, the market tried to advance and move higher several times but failed.  

Early this week, the market was expected to open up strong on the back of Wall Street’s upbeat weekend performance last Friday that propelled the Dow Jones Industrial Average (DJIA) to rally 701.19 points or +2.12%, after a strong jobs report which showed non-farm payrolls in May to have increased by 339,000. This number was almost 50% higher than estimated. It also overshadowed the jobs report for April of 294,000 only.  Wall Street’s uptick was galvanized further by the approval and signing into law of the debt ceiling bill that pulled back the US from the brink of default.  

As it turned out, the market barely managed to climb higher.  It made a net gain of only 9.63 points or 0.14% on Monday, June 5, when it settled for the day at 6,521,64. Total volume was high with 1.7 billion shares but total value turnover was low at Php3.36 billion. Apparently, trading revolved mainly on third line stocks while majority of investors continued to book gains as a defensive strategy against prevailing uncertainties and lack of more positive developments that have not yet been discounted.   

The trading activity of foreign investors may have also contributed to the market’s low performance. The market’s upward bias was both restrained by their net selling activity for the day while accounting for 55.06% of total market transactions. 

The market even sank lower the next day. It closed on Tuesday, June 6, at 6,479.93, down 41.71 points or -0.64%. Total volume was even higher compared to the previous day with 1.80 billion shares, while total value turnover was still low at Php3.88. billion. Foreign investors’ trading activity didn’t seem to have made any material impact in the market’s outcome despite their trading tack. They had a market participation of 55.42%, but only played a minor role as net buyers for the day.

On Wednesday, June 7, the market closed the day at 6,564.70, with a huge net gain of 84.77points or +1.30% on a trading volume of 801.80 million shares and total value turnover of Php4.14 billion. Foreign investors’ trading activities and direction contributed significantly to the market’s climb. They accounted for 58.81% of total market transactions and played as net buyers for the day.

New leads and timing to buy back

Inflation rate, or the pace of increase in the prices of goods and services, went down further to 6.1% in May. This is the fourth consecutive month that inflation rate has gone down this year. It fell at 6.6% in April from the 7.6% in March, which in turn was also lower than the 8.6% of February. Forecasts claim that inflation could settle within 5.8% to 6.6% as a result of declining prices of energy and food items.   

Investors, on the other hand, will be having some upcoming cash dividends again starting this week from several listed issues, which continue to outperform. 

Headways are starting to materialize further in the banking, energy, food and mining sectors, as well.  Most of these are not yet factored in the current market situation, so that they are expected to make positive impact in the market soon. 

So, be ready to buy or buy back, as the case may be. When?  Between the trading calls discussed earlier, I recommend that you follow the strategy of entering or re-entering “after the market gets back above its current 6,600-resistance level.” The recovery is an indication that the failure has been overcome and that the underlying trend can resume.

Role of ‘entry’ in the trading equation

The trading equation is a cycle made up of two individual components: the entry or buy side and the exit or sell side. How they are handled determines the outcome of profit or loss made.  

As part of the same cycle, we may normally think that when to buy is as important as when to sell.  But you may be surprised to know that success and failure in your trade depended more on when to sell.  This is because the stock market is said to be “mean-revertive.”  

Mean reversion is a financial theory which postulates “that asset prices and historical returns eventually revert to their long-term mean or average level.”  

Thus, you can enter randomly – like tossing a coin in deciding when to buy – and still manage to make a profit.  Let’s also talk about the different techniques used for good entry next time. – Rappler.com

The article has been prepared for general circulation for the reading public and must not be construed as an offer, or solicitation of an offer to buy or sell any securities or financial instruments whether referred to herein or otherwise.  Moreover, the public should be aware that the writer or any investing parties mentioned in the column may have a conflict of interest that could affect the objectivity of their reported or mentioned investment activity. You may reach “Thin Slicing” at densomera@yahoo.com)