January 12th, 2009

AGNC, DSCM, LMDIA and OCNF: Lessons in Chart Reading

I can’t help but respond and dispute Devin Hobbes blog series on the Seeking Alpha site entitled “Does Technical Analysis Work?” In the two articles to date, Hobbes selected two stocks (charts) “at random” in the first article and added two more in the second.

In the first article, Hobbes revealed his bias against technical analysis by writing

“There are three general opinions of technical analysis: (1) it is a science that works, (2) it’s a pseudoscience that works because its practitioners all do the same thing when a chart is a certain way, or (3) it’s a bunch of hogwash. I’m somewhere between (2) and (3), but am more open to (1) …. I would like for (1) to be true, as would most people, for obvious reasons ….. A major thing that can skew results is that I can easily misread charts [my emphasis]. For this reason, I’ll stick to the so called archetypal patterns: double top, double bottom, head and shoulders, cup and handle, etc, that are easy enough to identify with software.”

So Hobbes then selected two stocks “at random” in the first article on December 9 and included charts as evidence: AGNC as an example of a double top and DSCM as a double bottom. In his second article, he added two more: LMDIA and OCNF.

Bottom line? Hobbes did misread the charts that he selected on a number of counts. But first the charts:

Hobbes may have seen a “double top” in the AGNC chart but I surely didn’t. As a matter of fact, AGNC was a new issue since the summer, is in the Finance-REIT Industry Group according to IBD. In fact, according to Google Finance:

“a mortgage real estate investment trust (REIT) that invests in agency securities for which the principal and interest payments are guaranteed by a United States Government agency, such as the Government National Mortgage Association (GNMA), a United States Government-sponsored entity, such as the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Agency securities consist of single-family residential pass-through certificates and Collateralized Mortgage Obligations (CMOs).

If Hobbes would have taken the time to look at charts with different time horizons he would have seen that AGNC was at the top of the 15-20 trading range. The stock may create another pivot point and retreat from this fairly clearcut upper-boundary resistance trendline (thereby justifying his spurous call of a double top). On the other hand, it just might as easily break above the trendline and move to new all time highs. As a matter of fact, these are the criteria you look for as opportunities for long-term, relatively low risk and large gains. (Note: the stock did move above the trendline in a 6.2% move on December 22 and closed on January 9 at 20.83)

The only thing that DSCM has going for it is that it’s a significantly mangled, low-priced stock that went public at the height of the Tech bubble; it hit a peak of 67.50 at the end of August, 1999 and was 0.59 on September 19, 2001. It was one of those low-priced “perpetual call option” stocks I wrote about earlier riding the recovery wave out of the Crash hitting a peak of 9.19 by September 2003.

But since 2003, it’s been trending back down with the current Credit Crises Crash putting a nail in this coffin. But Hobbes, instead sees a “double bottom”. I’m sorry, he’s going to need to have his eyes checked.I don’t see any bottom forming-and no double bottom to call a relatively safe, high opportunity trade. As a matter of fact, this is a stock that I wouldn’t touch with a ten-foot pole.

How about LMDIA and OCNF? Hobbes wrote that LMDIA “is displaying a double top on its chart. The pattern takes shape over about a week. We’re looking for the stock to fall, as a double top is a bearish signal.” Let’s look at the chart:

Can you see a double top? I can’t. But the stock may actually drop as it bounces off a resistance trendline on the road to forming a larger more extended bottom formation of some sort over the next several months. And what about OCNF? Hobbes may have gotten one right:

The one crucial component in this analysis was that none of the comments took into consideration a factor that will control 50% of the movement of these stocks: the stock market. If the market starts heading down to new lows, there is nothing in any of the above charts which will make the stocks go up. And if the market does in fact deliver a celebratory Inaugural rally, nothing will hold a stock down.

That’s why I spent so much time in my last post on the state of the market. Until the market moves out of its current range, there is no trend and it’s nearly impossible for an individual stock to establish its own trend independently. The one thing Hobbes was correct about was that if you don’t analyze charts correctly, you will be drawn to the wrong conclusions.

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