Comparisons, Connections & Conspiracy Theories, page-357

Your general chart Pharma of the cyclical nature of investor emotion represents the basic concept on which technical analysis is based, and also why a contrarian approach is often successful. Obviously in practice, one derived from the price patterns displayed by an individual stock would be of value in informing unemotional decisions.

There are a number of TA tools available for this purpose, but one that I find of particular value applied to small caps is the MACD Indicator in association with its Percentage Histogram. Its application to the CDY price swings of the last seven years is shown below.



I favour the MACD 200/52/23-day combination, and this has been selected for the displayed chart. General rules for its medium-term use that appear to work are:

BUY signal: The Histogram (white) crosses to above zero with the MACD 200-52 (green) still below zero.

SELL signal: The Histogram tops and begins to fall (with the MACD normally still rising).

The timing of how these rules could have been applied in practice is represented by the vertical green (BUY) and red (SELL) lines that I have placed on the chart.

Generally, the level of the MACD’s position is a good indicator of over- or under-valuation, with the points of capitulation and despondency always occurring when it is well into the negative. Clearly that is where it is currently, and with the Histogram rising from below zero.

As Lev says, whether this is seen as a cause for opportunity or despondency would depend upon each individual’s concept of investing, either in a business or in its share price, and their ability to make unemotional decisions in doing so