This morning the SEC halted trading in a (previously) small, over the counter stock; Cynk technologies (CYNK). Trading in the stock was, to quote the SEC, halted "because of concerns regarding the accuracy and adequacy of information in the marketplace and potentially manipulative transactions in Cynk's common stock." In other words, something fishy was going on. The initial reaction of anybody looking at the 3 month price and volume chart (below) for the stock would be “You don’t say!”
Obviously, this isn’t normal behavior. The company appears to have no revenue or assets and was trading at $0.06 in June before jumping to around $15 this week. I have no idea what is going on, but I do believe that this story illustrates one of the problems inherent in a market dominated by computers and price action rather than people and fundamentals.
The real danger to individual traders and investors that computerized trading poses is that in some situations there is no little boy to point out the Emperor’s lack of clothes. Real people observing what happened in the case of CYNK would, at some point, have looked at the fundamentals of the company. As the realization grew that there really were none, short sellers would have emerged and the farce would be over as soon as it began. In this case it took the intervention of a regulatory authority to bring everyone to their senses.
Computers, or people for that matter, programmed to react only to movement in price have no such ability. Instead the movement itself is enough to attract them and, as can be seen by the volume bars on the above chart, they will pile in regardless. If that is actually what happened here it wouldn’t be the first time... “Flash Crash” anybody?
I have no information as to what caused this particular run on CYNK, but there are lessons to be learned regardless. While, as I pointed out in this recent article, investors can and should use some of the techniques of traders to manage a position once it is formed, technical signals and short term price moves are a terrible reason for those with a longer term view to initiate a position.
Looked at logically, this is obvious. What happened when a particular level was reached in the past has no logical bearing on what will happen this time; the situation has changed. Sure, there will be some resistance at previous highs and support at previous lows, but if a company is making more money than before then its value will increase, regardless of any limes on a chart.
It is not that you shouldn’t use technical analysis to back up a view or figure out the all important parameters of an initial trade; where you will cut it if you are wrong and where you will take some profit or at least re-think the position if you are right. It is just that unless you are looking at the very short term, taking a position based solely on what happened in the past is crazy.
Technical analysis appeals to us in many ways, and the more complicated it is the better it seems. Researching a company is hard and predicting its future even harder. The thought that there is some magic formula that will predict market moves without all of that work is appealing and if it is really complicated then it somehow seems more impressive. Don’t be fooled, though. Technical analysis has its place for those whose investment horizon is measured in minutes, but for the average investor it is fools’ gold.
The CYNK saga is of course an extreme example, but the simple fact is that watching what others are doing or what they did in the past is no substitute for the old fashioned approach. Research and discipline are still the keys to successful investing.