Tuesday, May 22, 2007

Patience, a golden quality

Someone once said that if you can't envision an asset gaining many multiples in value then you will be unlikely to invest in it. I'll add that if you can't envision your trades gaining substantially in value you will be likely to sell too soon. In the first chart we see the Shanghai index bottoming in July of 05. The Chinese stock market had just lost over 50% of it's value. Sentiment at this time would be black pessimism. So when the market started to rally I'm sure there was plenty of scepticism. How many people do you think had the patience to hold on for a 25% gain? How about a 50% gain. The market was already trading parabolic at this time. I suspect quite a few were taking profits and calling the top or at least a serious correction. Well in the second chart we can see that after a short pullback the market shot straight up to over 2000 in 7 months. That's over 100% gain in a year and a half. This market is getting ridiculous you say it can't keep going. Now it's REALLY trading parabolic. SELL, SELL, SELL. On to chart three. But wait after a sideways consolidation the Chinese market doubled again. Remember good ole technical rule #1? This is why I use the COT report. Here in the US we have a tool that gives us some kind of legitimate sell signal. If the big boys are selling then they are removing the liquidity that the market needs to keep going up. As long as I follow the smart money I won't get impatient and miss a potential run like this.