Sept. 1, 2011- A Little Common Cents Corner # 8- Fractal Framework (In Depth Analysis of LC/LCB)

 

From clouds and snow flakes, to crystals and blood vessels, fractals are easily found in nature, and yes, I personally believe along with other technical analysts that fractals exist in the stock markets (human behavior follows a fractal framework).   Coined by French mathematician Benoît Mandelbrot in 1975, a “fractal” is a rough or fragmented geometric shape that can be split into parts, each of which is (at least approximately) a reduced-size copy of the whole, a property called “self-similarity”.

I’m not the first technician to say that the markets happen to work in fractals.  I believe Brian Shannon wrote a book completely on using multiple time frames in technical analysis, to help piece the larger puzzle on the most plausible trends that a stock will likely behave in your chosen time frame to predict.  Elliott used waves, curves and ripples of the ocean to explain the parallel movements of charts in the markets.

This is the 2 year daily chart of Lepanto Consolidated Mining (LC)  and a typical chart behavior:

You can use this chart behavior to make your own analysis.  You can assume that during the past few days when LC was hovering at 1.80 with the angle of the ascent in a dizzying speed that we were “short term” moving in a delusion stage.  These past few days when the stock slumped to 1.46, we oversold and have gone to a short term despair mood.  It’s my opinion that we will most likely take a return to the mean.

Returning to the mean does not in any way mean that the stock will go and meet those previous highs.  Only time and adequate bargain hunters at possible supports can ever confirm such market action.

On Volume of Transactions

In lofty situations, it is difficult to tell whether those who got to buy cheap (those who accumulated between 40-60 cents areas) aren’t the ones unloading and taking profits in the short term top areas of 1.60-1.80.  Nor does that mean that they didn’t average their prices up between the 90 cents to 1 peso consolidation range, right?

With the amount of volumes teetering between an average of 500 Mil – 1.8 Bil worth these days, even if you have 100-200Mil pesos worth of shares, you could get around 20-50 Mil pesos out quite easily without damaging the price, while the stock was going up.  Now that the stock’s crashing, I wrote a post on “How To Distribute Shares” which is essentially written by Mr. Edwards and Magee who are considered the fathers of modern technical analysis.  If anything else, a simple absence of heavy selling and buyers coming in at apparent levels of support (1.40-1.50) areas – 50% Fibonacci Retracement from the 1 peso breakout to 1.80 short term top, as well as a 20 day moving average provides comfort to those who are gutsy enough to catch a falling knife.  Research states that 20 day moving averages hold as temporary support especially for strongly trending stocks.

The volatility in the stock is due to confusion and overcrowding more than anything else. There’s a famous saying in Wall Street, that if everyone is bullish, who is left to be bullish?   If you’re trading the short term time frame on LC/LCB (which means you intend to only keep this stock in your portfolio in a week or less), then it’s going to react with every emotional bias that the supply of people caught upwards of 1.70-1.80 are in right now.  Nevertheless, if you’re playing the LC/LCB in a medium term time frame (6 months or so)- your trailing stop, although gut wrenching can possibly be near 1.40 – 1.50 (a 50% fibonacci retracement that’s enough to cause your stomach to churn) but is quite a normal and healthy correction given the steep ascent of the stock.

I’d keep things simple.  If it breaks 1.40 and can’t find any buyers, we’re going to get a larger correction no matter if Gold prices remain high.  Of course, my guess is… there’s enough buyers to rotate somewhere in those levels.  Could we diverge though, given that the US markets look to have just rallied below the zero line in MACD which is a perfect rally to short?  Check $AUDUSD- looks like a good short area at 1.0710. Place stops at 1.0800 and target at least 100 pips downward for an overnight trade.

-FT

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4 Responses to Sept. 1, 2011- A Little Common Cents Corner # 8- Fractal Framework (In Depth Analysis of LC/LCB)

  1. tmac says:

    I’d say, LC is one of the best trading stocks available now. Just know where to buy at key support levels, and know when to get out if youre wrong. Very nice chart analogy. Hopefully, we can get to “return to normal” first (September) before “return to the mean”.

    Like

    • thanks tmac for the comments. I follow your thread over at finance manila too once in a while. For momentum traders (we dont really care about valuation) and its really just supply and demand. I have no problems in trading LC, and yep— if supports break— i won’t be some buy and hope dude who won’t bail. In any case, i’ll be one of those momentum traders who’ll check whether those first lines of support hold 😀

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  2. Aris says:

    Nice post. I agree with the chart above. Sums up everything really. I keep saying this investors are buying only in good times and they sell in bad times. They repeat this process until they go broke. In my experience, this is a poor investment decision. They should be buying (of course good companies) when everyone is scared of buying, when the stock is basing, when the market is selling, not when it is going up! The most upside potential is only possible during a bear market. San Miguel at 50.00, URC at 5.00, RCB at 9.00 these were selling at less than 50 centavos to 1 Peso in 2008. True bargains! But wait people don’t didn’t buy in 2008, they were scared of losing money. Instead they buy when something is going up right?

    From the Shelby Davis principle..”You make most of your money in a bear market you just don’t it yet”.

    You create most of your investments value by buying during a bear market. Even the good companies will sell! Your 200K can be turned into 2 Million easily! Say you put 200K in URC at 5.00 in 2008, today those investments would be worth 1.6 Mil. You and I know URC has been around for many years and they make great products that are well known to Filipinos. The opposite is true in a bull market, you create most of your investments value by selling during a bull market. The bull market is merely a vehicle for short-term speculation for us and also reducing our holdings. The real game is when the market drops 20 – 30%!

    The LEPANTO is below 20 day moving average for the first time in 9months. Huge volume are exchanging hands, in one day 1.8 billion Pesos worth of volume. Who knows when the shit will hit the fan. We’re about to find out who’s swimming naked when the tide goes down!

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