Building a weight of evidence

Building a weight of evidence is always the aim when making a case either way for a price move by a stock.

Sometimes the evidence is strong and generates a clear signal whilst at other times when it’s not as clear then a neutral stance is the safest route. It’s that simple but ‘seeing’ the evidence clearly and for what it is without tainting with your own biases is difficult at times. That’s why we build rules to control our biases and influence over what the price action might bring. Detaching yourself is a real discipline. These rules are built, developed and fine-tuned over time, that allows you to develop good rule-based arguments that control your trading (and yourself) and that will generate consistent results. These rules will have an objective that you have set out to achieve. Then from a quant perspective it is a matter of overlaying the rule based template on stock price behaviour and repeatedly and automatically responding to the signals generated. That ‘consistent’ process equals ‘consistent’ outcomes. Market conditions will dictate, to some degree performance and your rule-based trade plan also needs to be able cater for that whether its generating profits or simply maintaining a cash (safe) position that is not losing your money. Sometimes that is the best place to be.

My starting point of analysis is to identify major price points of resistance and support that the price moves through and then look to the specific price action to generate one of my three price setups. Above you can see NVT has a strong combination of support followed by trend reversing price action that puts high odds that NVT may move to the next resistance level ($5.50-6.00). Support comes from a ground swell of arguments that include rising volume levels as the price tests support and then follows the trend reversal price action higher adding a healthy degree of validation. The price is now above the moving average, which heightens probabilities that the price can rise further. The final argument to be put in place is; does the stock have momentum (crowd behaviour). Well that’s not happened yet as the reversal of price from down to up may only just be beginning. When the MACD does rise above zero it adds a positive price acceleration factor to the mix. Having double bottomed off support and triggered a trend reversal with strong Trend Intensity (Stockradar’s unique trend filter) support it puts NVT in a position of confirmed trend status. This means the the price is more likely to rise than fall.