My worst call of the year

Working on the institutional buy-side, we had the opportunity to hear from many brokers, strategists and analysts in the industry. And I was thrilled that some of the best technical analysts came to talk to us about charts. One of my favorite questions was, “What was your worst phone call in the last six months and what did you learn from it?”

For a professional strategist, dwelling on bad decisions is certainly not a pastime. They would much rather discuss your exceptionally forward-thinking calls that everyone should hear about! But if you want to become a better investor, you need to spend less time celebrating your gains and more time analyzing your losses. And if you want to be a more successful investor, here are some questions to ask yourself after a big failure:

• What evidence did you miss that would have led you to a more ideal conclusion?
• What tools could you add to your toolkit to better manage this type of environment next time?
• How could you better manage your time during the day/week to ensure you are better equipped to understand what is happening around you?
• What could you do to improve your money management processes to manage risk more effectively when you’re wrong?

These are the questions that can only really be answered if you look to the end of the year as a time to constructively reflect on your experience as an investor.

That brings me to Ten questions I ask myself every yearwith the aim of improving my investment performance, reviewing missed opportunities and improving my routines. I am pleased to now give you my answer to what is probably the most painful question of the ten: “What was your worst trade and what did you learn from it?”

Overall, while I feel pretty good about staying bearish for most of 2022, I’ve had a couple of big misses. And that brings us to the chart for YOLO, one of the US-listed cannabis ETFs.

To be clear, I consider myself a trend follower. My goal isn’t to buy the floor, pretty much never. Rather, I would like to wait for some “signs of accumulation” in the form of price improvement and bullish momentum characteristics.

Knowing this fact, you might be wondering why I thought YOLO at $6 was a good buy.

The non-technical reason is that I believe in the long-term potential for the cannabis industry, much like I believe in the long-term potential of blockchain technology. I’m now seeing the signs that these emerging issues have plenty of upside potential. But, as Jon Markman so aptly put it in his book Fast investingeven if you know that a particular theme will work over the long term, there are no guarantees as to which products, companies, and trading tools will benefit the most as those themes evolve over time.

Which brings me to the clear technical evidence against buying YOLO for $6, which I clearly ignored at the time. Here’s my diagram, but with some additional annotations to illustrate what I could only describe as a confirmation bias rampage.

First off, the chart began making lower highs and lower lows in early 2021 after the excitement of the 2020 election cycle had fully subsided. Cannabis stocks had seen a major upleg in the fourth quarter of 2020, but a clear downtrend was in place through the spring of 2021.

I remember exactly what struck me in July and August of this year. Very simply, I noticed that YOLO didn’t go any deeper. The lower lows (which had been a signature move on this chart for about 16 months) had dissolved and the chart appeared to have halted its interminable decline.

Has the price actually broken above the resistance? no And here I’ve missed one of the core principles of Dave Keller’s investing process — waiting for confirmation of a change.

I’ve talked and written about follow-through days or the two-day rule or whatever you want to call the idea that you need confirmation of an outbreak before you explain the outbreak. I didn’t have the patience to wait for a break above $6. So instead of waiting for a breakout, I placed the order at around $6. And I’m still waiting for that bullish move as YOLO fell below $4 this week.

Next, I ignored the momentum characteristics, which were clearly still negative. Notice how many times the RSI spiked to around 60 during short-term rallies, only to see the price bounce back down soon after. In early December, the RSI briefly broke above 60, but when it did the price formed a shooting star candle with an intraday high right at the established $6 resistance level.

Finally, and perhaps most embarrassingly, we have long-term chronic underperformance, as illustrated by the relative strength ratio in the chart below.

So in this case, I’ve ignored something I tell our viewers at least 12 times a week: Focus on charts of increasing relative strength.

Full Disclosure: I still own the position at YOLO. It’s in a retirement account and I like to bet on long-term upside for this industry group. But in my excitement at seeing a stalled downtrend in a group I’m fundamentally bullish on, I managed to ignore what now seem to be clear signs that the chart was still bearish.

Why am I taking the time to relive this colossal failure at the end of 2022? Because I want to be a better investor every year. And the only way to really do that is to admit mistakes, reflect on my decision-making process, and make changes to minimize the likelihood of a similar mishap in 2023.

It’s your turn. What was your worst trade of 2022 and what did you learn from it?

By the way, would you like to see the other nine questions I ask myself at the end of the year? Just go over there my youtube channel.

RR#6,

David

hp Are you ready to improve your investment process? Cash my youtube channel!

David Keller, CMT

chief market strategist

StockCharts.com

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation or without consulting a financial professional.

At the time of publication, the author has no position in the securities mentioned. All opinions expressed herein are solely those of the author and in no way represent the views or opinions of any other person or organization.