believe a change can come.
This is especially true when a stock has been going up for a very long time or if it has been going down for a very long time. These investors tend to allow the emotion of greed in long uptrends and fear in long downtrends to cloud their judgment.
For instance, there comes a time when a good company's stock trades lower for such a long time that it eventually becomes cheap relative to its earnings. At some point, the value gets so great that large institutions can't hold themselves back anymore and they buy-buy-buy! And that reverses the trend as the buyers overtake the sellers.
Many times, toward the end of these downtrends, the chart will leave clues that a turnaround is likely to happen as well. For instance, take a look at China National Offshore Oil (CEO) below.
While the price itself had been sinking, in the March-July period, the RSI and MACD started diverging as these indicators firmed up while the price continued to drop. Divergences like that happen because it shows the downtrend is slowing down (which means buyers are getting more aggressive relative to the selling volume) and its starting to slow down the downtrend. If that buying continues, it eventually reverses the trend.
Some of those slowdowns toward the end of a downtrend form patterns, such as the "falling wedge" pattern above (which is actually a bullish pattern). The price's descent begins to slow and the price coils up tighter and tighter. It's at this point when many novice investors are throwing in the towel because they just see a stock near or at 52-week lows and a stock that is spending a lot of time near those lows.
However, just as soon as they sell out en masse like they did in the month of May, the buyers quickly overtake the exhausted sellers and the trend changes, just like the RSI and MACD suggested would likely happen.
Now, you'd have never gotten these same investors to believe that the stock would go from a 52-week low to close to a 52-week high in the span of three short months. Yet, that's what happened. (Emerging market stocks do have the ability to get there faster than a mature U.S. based company).
Over the past month to month and a half, investors have been buying up the stock like crazy (green boxed area). Now, no doubt, the stock needs a serious pullback. And this article is certainly not written to get you to buy it now...but it's simply to point out how "what has happened" isn't forever going to be "what "will happen".
The novice gets lulled to sleep in long uptrends and they get depressed and angry in long downtrends. They become emotional and therefore, irrational and make bad decisions. Logic goes out the window and they no longer view the stock objectively.
That's why it's so important to stick to things that are measurable such as fundamentals, technicals and sentiment.
So when you think, "My stock is going down and I never see a day when it turns around"....or "My stock is going up and this stock will never turn down"...beware! That's being an emotional investor and not a Logical Investor.