Business Cycle InvestingAs the nation and the world slowly dig themselves out of the worst economic downturn in eighty years many seem to have forgotten the ability to profit from business cycle investing. First of all business cycle investing is not earnings season investing. The latter has to do with when companies report earnings. The ability to accurate predict corporate earnings and trade stocks or trade options accordingly leads to stock trading and options trading profits. Business cycle investing has to do with the cyclical rise and fall of the economy and predicting the fortunes of different types of stocks during recession and boom.
A person beginning investing in the stock market may have heard that long term investing is a good idea because stocks outperform many other investments over years and decades. Then investors and traders new to the stock market find themselves in themselves in the midst of a downturn in stock prices caused by a recession. However, not all stock prices are going down. How can that be? It has to do with business cycle investing. One can use both fundamental analysis and technical analysis of stocks to anticipate stock price changes during a business cycle. Using technical analysis tools such as Candlestick stock charts traders and investors can profit in business cycle investing.
A business cycle is a cycle of the economy from boom to recession to boom again. They are called cycles but the only cycle is that the economy falls and then rises. This can occur over months or years and it not totally predictable. Looking at these cycles in retrospect they are defined in terms of rise or fall of gross national product. For traders and investors interested in profiting from business cycle investing it is necessary to understand how some stocks benefit from an economic downturn while others falter. Manufacturing stocks, auto makers, and the sellers of high end consumer goods will typically sell less of their product during a recession and therefore see their stock price fall along with their earnings. Companies that make soap, bathroom tissue, bleach, tooth paste, and all other basic consumer items will usually not see much if any drop in income. Stocks with a margin of safety or continuing intrinsic stock value will often see their prices rise as other stocks fall. Many dividend stocks like power companies also, usually, rise during a recession because they retain their income and attract investors fleeing from downward moving stocks.
Investors and traders profit from business cycle investing by either selling short on stocks that are plummeting or buying stocks that are likely to rise in price as a recession deepens. When a recession is about to turn around it is profitable to buy stocks that are depressed in price. An investor will look at a company’s price to earnings ratio and consider how much earnings are likely to increase as the recession goes away. In today’s world many have lost substantial amount of money in the recent stock market crash. It is easy to forget that markets recover. Market trends reestablish themselves and buying at market reversal when the economy starts to recover can be profitable business cycle investing.
Market Direction: What is the basis for profitable candlestick trading? Probabilities! The Japanese Rice traders have revealed signals and chart patterns that produce a high probability of producing profits. They have also provided background information on each of the major signals. This information allows the candlestick investor to better identify what is going on during a current trend. As can be seen in the Dow chart, the Dow has closed lower for the past three trading days. However, the formations reveal there is not a great urgency in the selling. The signals reveal indecisiveness. Trend analysis projections can be better assessed knowing the selling is not very powerful. Witnessing indecisive trading in the Dow, after same time the NASDAQ continues to show steady strength, it would be perceived as the trend remaining intact.
Not only does the direction of the indexes help in establishing the correct trade's, but the length and magnitude of the trend also provides valuable information. Trending stocks that have performed J-Hook patterns have diminished the element of exuberance in the trend. The Jay hook pullback is perceived as profit-taking before the next leg of the trend continues. A Fry pan bottom pattern reveals a new exuberance coming into the price. If these patterns break outs occur when it is obvious the trend is not changing, but probabilities of making much bigger profits is increased dramatically. As long as there is not a dramatic change of investor sentiment, individual stock prices will start incorporating the enthusiasm building up in the markets. As seen on the NVDA chart, the right-hand bottom breakout has produced huge profits. The market trends has not shown any change of direction, making investors more confident to continue to buy stocks after breakouts.
Investing with candlestick signals is merely putting all the probabilities in your favor. Many investors spend decades trying to learn why prices move the way they do. Candlestick analysis simplifies that analysis. The common sense elements that create the candlestick signals and patterns, once learned, become very powerful tools for understanding why prices move the way they do. Human nature provides reoccurring patterns when it comes to investing. Once those patterns are recognized, they can be exploited for very large profits. In most cases, candlestick analysis not only provides visual capabilities to recognize which direction a trend/price will move, but also recognize which pattern setups will provide inordinate profits.
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