Posted by: stockscooter | January 23, 2012

Frequency Modulation

There are frequency tendencies in all markets.  They just need to be uncovered. I call this frequency modulation.  Just as waves on the ocean overlap, they increase the wave size or decrease the wave size.  When many waves hit simultaneously in the same direction, then the large rogue wave is created.  This is exactly how I address the markets.  Through frequency modulation, I uncover these frequencies and exploit their pricing, in order to optimize risk and return.

You might ask, “Why are market frequencies important to the average investor?”  Well it’s important to be on the proper side of the market.  You wouldn’t want to initiate a position at an inopportune time or sell before the rally has concluded.  That’s wasting time and money and isn’t a shrewd way to conduct business.  Let’s take a look at the graph.

In the bottom window you’ll find a black strength line that has red and green balls on it, which indicate current trend.  If the line is proceeding upward, or green, that would be bullish.  If it’s pointing down or red it’s bearish.  We always want to invest with the trend or strength of the market. Therefore we buy when the black line is bullish or short when it’s bearish.  There is also an oscillating ribbon in that same window.  This shows the heart-beat of the market. The last peak oscillation was in October 2009, as noted by the light blue line.  Many analysts were predicting higher prices here, because the past four months had been upward.  However, the black strength line was proceeding downward (bearish), and the oscillator was topped-out in the overbought area (also, bearish).  This represents a clearly bearish scenario and a point to take profits if you hadn’t yet, or to start selling the market short.  If you would have taken the bullish analysts opinion as the truth, your asset would have fallen about 9% in the next few months. Obviously, the optimal choice is to wait and buy the market at the depressed level. The benefits are as follows: 1) There would be no loss in portfolio value during the next few months, 2) The money would be at least earning interest while waiting for the proper entry point,  3) The lower price at entry would allow you to purchase a larger number of shares, 4) More shares allows for greater returns when sold at the higher prices that followed, and 5) Most importantly you could have shorted the market with the downward trend and had profited up to 9% in those few months.  These 5 benefits are enormous when you consider reversing the positions.  That’s because only now, at the last price on the chart, is time to buy it.  What you don’t see on this graph is that the “buy” that occurred at this market bottom advanced over 20% in the next 5 months.  That’s a combination of 29%return in less than a year.  Now, the analysts that were bullish ultimately were correct in their view, however they made about half the return. For those trying to find a mutual fund where you can make 1% more than your current fund, how about considering 100% more return?!  By the way, this was done in the guaranteed and less volatile U.S. Treasury Bond market and not in volatile stocks.  So much for Stodgy old bonds!

There is much more supporting evidence for the respective buy and sell that I just described, than just this one window of analysis.  The market frequency work that I do is conducted on different time frames and with different models for those time frames.  Those areas of analysis will hopefully be shared in future blogs.

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