The What, When and
How Much of Investing? (Part 2 of 3)
By Peter S. Iuvara
of investing" will answer the important question of whether
now is the optimal time to invest in the security or not?*
For this question, I like to use technical analysis. Technical
analysis has gained a lot of respect over the last decade
or so. Simply speaking, technical analysis is the process
of reviewing historic data, usually stock price charts, and
estimating where the security will go from there. Some of
the most commonly used methods to technical charting are trend-lines,
moving averages and support / resistance levels.
Trends (trend-lines) are an important
measure of momentum. A trend can either be upward or
downward facing. Uptrends are drawn by connecting subsequent
troughs, or bottoms; downtrends by drawing peaks, or tops.
Once the line is drawn, you can extend it in anticipation
of where the security may be trending to in the future. Investors
are typically "bullish" during uptrends and "bearish"
The most popular interpretation of moving
averages focuses on price movement relative to the average
itself. Investors are typically "bullish" when the
price of the security moves above its moving average and "bearish"
when the price falls below its moving average. Moving averages
are also extremely useful in smoothing the securities movement
Support / Resistance levels are another
key indicator in technical analysis. These levels represent
where the security is trading relative to its historic stock
price highs and / or lows in a given time period. The security
usually has difficulty passing either up through a resistance
level, or down below a support level. They provide trading
ranges as "expected" levels of where the stock should
be trading. Investors are typically "bullish" when
the security passes above its resistance levels and "bearish"
when the price falls below its support level.
All of the above indicators should be used
together as starting point in determining the timing of investment
decisions (the "when").
Technical Analysis is the second important
step in, The What, When and How Much of Investing,
but there is more! We still have to answer How Much.
Be sure to check out Part 3, same time, same place next week.
Make Profitable Investment Decisions!
*Investor sentiment will also figure into
this decision, but it will be discussed in detail separately
in Part 3.