The Three Richest Men That Ever Lived…

Originally published on, September 20, 2016.

When we think of the richest people of our time some names that come to mind are Rockefeller, Carnegie, Gates, and Buffett, among others. But the combined wealth of those four doesn’t hold a candle to the three others – “Mr. Shoulda,” “Mr. Woulda,” and, of course, “Mr Coulda”.

Far too often do traders and investors reflect on their investments in terms of “should have,” “would have, and “could have.” Everyone has heard that hindsight is 20/20 – capitalizing on these opportunities before they’re missed is of the utmost importance.

Investors have been trained and conditioned to look at investments through the lens of past performance, through the assumption that previous trends will continue. Specifically, investors evaluate past performance on two bases – fundamental and technical analysis.

Fundamental analysis is the analysis of a particular company/stock’s performance based upon their financial reports that are released quarterly or annually. On a quarterly basis, all publicly traded companies are required to report their revenues and earnings. From this information comes the important calculations of Earnings per Share, EBITA (Earnings Before Interest Taxes Amortizations) and P/E Ratio (Price/Earnings) amongst others. Investors are taught early on to buy strong stocks with good earnings, a healthy balance sheet, and a strong management team. While this is good advice to follow, it’s also important to consider where that stock is when all of these things are present.

If a company has already taken great actions that have led to great results the price of that company’s stock is high – but why? Stock prices are controlled solely by the supply and demand of the shares primarily by large investment institutions. These investment institutions have tremendously large and dedicated teams designed to research a company’s performance before their results show up on the balance sheet. The fundamentals of a company that an individual investor looks at are ancient history to these large teams that have the most up-to-date information available.

Technical analysis is the evaluation of a particular company/stock’s price action to determine its future outlook. Individual investors should look for the following:

  1. Stocks that are in uptrends
  2. Stocks that are above key moving averages

A great example of this was the announcement from Home Depot about their most recent earnings results. According to the Home Depot press release dates August 16, 2016.

"We had a solid quarter, achieving the highest quarterly sales and net earnings results in company history as housing continues to be a tailwind for our business," said Craig Menear, chairman, CEO and president. "This was made possible by our hard working associates in their continued dedication to our customers."

Look at the attached chart, which shows Home Depot (HD) on the day that there was an earnings press release. Notice the uptrend and that the stock is above key moving averages on the day of the earnings release.

Why the stock market doesn't react the way you'd expect from watching the news.

This chart is a prime example of a chart that shows nothing but filled orders. A chart is nothing more than a picture of orders that have already been filled. The true movement of price, however, isn’t found in filled orders, but in unfilled orders. We will never know for certain where all of the unfilled orders are, but looking at the Supply Zone in the attached chart does show a few interesting things.

An explanation of supply and demad in the stock market.

This is a picture of Home Depot after its earnings report was released, which illustrates a huge drop. But why the drop? The yellow box representing the supply zone and buyers and sellers suggests a lack of balance, which led to price going sideways. Once price fell from that area there had to be unfilled sell orders remaining and price became out of balance. The good earnings news was just what price needed to push into those areas of sell orders. The unfilled sell orders that remained was the reason for price falling.

If you want less “Shoulda, Woulda, Coulda” in your trading it is best to learn to spot unfilled orders before the fundamental and technical point you in the wrong direction.

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