Rules of the Game: One Trader's Bargain

 | Feb 04, 2013 | 5:30 PM EST
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For years, I was a trading coach. That was my entree into the financial services industry. I trained retail traders on spotting chart patterns, moving-average support, up or down moves on heavy or light volume and areas of tight weekly closes, among other technical signals.

I did this for more than a decade. But over time, I began to feel as if my seminars and radio shows were not really helping many people. In fact, I began to feel like a pusher, enabling traders' addictions.

Yes, it sounds like a cliche, but I really did take a step away from it all, moving to Santa Fe, N.M., to get some perspective. Up here at 7,000 feet, surrounded by some of the original 1960s and '70s hippies and peaceniks, I realized that I couldn't continue aiding and abetting the typical, adrenalin-fueled trading behaviors.

I began to view the market from a longer-term perspective. I had been teaching traders to get out when a stock flashed certain technical signals. But something had long gnawed at me: When you went back and looked at the stock's long-term chart, the trend was undeniably up. In other words, by jumping out, under the guise of preserving capital, traders actually gave up the longer-term gains the stock was offering.

So I began not only tracking stocks that were clearing consolidations and entering new high ground but also stocks that were falling as the result of bad news or a disappointing earnings report. While traders who are focused on buying technical strength view these stocks as laggards, pure and simple, many investors who have a yearly -- rather than hourly -- perspective see these stocks as being on sale.

Philip Morris International (PM) is one stock that would not appeal to momentum traders. First, it is a megacap, and it is not likely to make a sudden, sharp move in either direction. It is trading about 6% below its 52-week high of $94.13.

Even with large stocks like this, which are investments rather than trades, I track the moving averages. Philip Morris' 50-day line is currently above its 200-day. That is not an ideal situation, and it suggests that the stock may be poised for further declines.

However, the longer-term line appears ready to cross over the shorter-term line. At that juncture, when the stock has 200-day support, it may become a viable candidate.

This is a significant departure from the momentum trading mentality I had for so many years. In that scenario, the 200-day line may as well be (to paraphrase Downton Abbey), the outer circle of Dante's inferno -- at least as it applies to stocks.

But here's the rub: For investors who have a longer-term view, isn't the key that old-fashioned adage of "buy low, sell high"? (For momentum traders, it's "buy high and sell higher." Sadly, it doesn't always work out that way, particularly as at-home day-traders or swing traders attempt to enter stocks just as the pros decide it's time to pocket some profits.)

In the case of Philip Morris, that means the stock is now on sale. The fundamentals support that idea. The company is expected to earn $5.21 per share when it reports 2012 full-year results on Feb. 7. That would be a 7% year-over-year gain. This year, earnings are seen rising another 11%, to $5.79 per share. Its dividend yield is currently 3.9%.

Is there room for more speculative swing trading within your overall investment plan? Yes and no. Yes, in the sense that swing trading of momentum stocks can be acceptable if there is a "fun money" account carved out, separate from your more strategic investments.

But if you have no financial plan to address your overall retirement goals, the answer is unequivocally "no." In that case, swing trading too often turns into wishing and hoping.

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