A technical look back at 2009's winning stocks

Trend analysis is a simple system of charting stock prices and identifying trends that can guide investors in their trading decisions. This column profiles different stocks based on their price patterns, looking for market and sector trends that support bullish movements of individual stocks.

Over the past eight months the column has profiled 33 different trading opportunities. Each stock, unit, or exchange-traded fund presented here was discussed in relation to their intermediate and long-term price trends, using these trend lines to direct potential trades. The year was full of many bullish trading signals, and some of them achieved above-market returns.

At the beginning of the second quarter of the year there was only one bullish trending stock on the Toronto Stock Exchange for every five bearish trending stocks. But by the end of June there were two bullish TSX stocks for every bearish one (currently that bullish ratio is about 5-to-1, but dropping).

Over 2,000 TSX securities have had a Stock Trends Bullish Crossover since the end of March - all representing a change in long-term trend as the 13-week moving average trend line crossed above the 40-week moving average trend line.

This indicator of share price trend, although lagging, is often a good timing signal for entering a market, or buying a stock. When the Stock Trends Bull/Bear Ratio turns positive, as it did in late May, the market is showing the breadth of its bullish sentiment and is a positive market timing indicator.

Certainly, the stock market presented many buying opportunities in 2009. This column tried to focus on those that shared in a sector trend and showed both positive price trend developments and building share price momentum. In the third and fourth quarters many other trading opportunities showed promise because of trend line support - stocks that could be traded based on the assumption of the share price advancing off identifiable price areas - were also profiled.

Detailed here in the table of performance results for these trades are a range of results. Almost 50 per cent of the stocks profiled are currently in a profitable position, with the average return of about 10 per cent after transaction costs. Some of the stocks have proved to be especially fruitful, advancing over 40 per cent since being profiled. Others advanced over the period, but challenged shareholders to make a decision about exiting when the share price retreated. Certain stocks would have been sold already because they hit sell triggers as the share price moved below the trend line or stop prices already defined in the column.

Descartes Systems Group, for example, was profiled in early June as a stock that would benefit from an improving transportation sector. The sector did perform well, and so did Descartes' share price. However, its stock dropped below its 13-week moving average trend line at the end of November and forced a sell for many shareholders. The stock subsequently recovered in December, and those market timing trend followers that sold on the November price drop would have logged a 20-per-cent profit - half of the current result for shareholders who risked staying the course.

Another performing stock, Tata Motors Ltd., would have also presented problems for investors after it was profiled. It's stock price dropped below the specified stop price and would have been sold before it recovered and eventually delivered its 75-per-cent gain since being profiled at the end of May.

Always calling an investor to action, the Stock Trends Weak Bullish indicator - triggered when the share price drops below the supporting bullish trend line (13-week moving average) - generally is a sell signal not to be ignored. However, sometimes a stock recovers and returns to its bullish path. This trade reminds investors that technical trading can sometimes take you out of trades that later regain a more profitable outcome.

The best performing profiled stock has been First Quantum Minerals Ltd. Among the leading big cap TSX stocks in 2009, it is up over 350 per cent since the start of the year. The stock was profiled here at its moving average crossover in early May and has advanced along its trend line fairly steadily since.

Up over 65 per cent since its bullish crossover, this stock's ideal trending performance shows the basic approach of trend line analysis: waiting for price trends to develop before committing to a bullish trade, then using the trend line as a price support guide post. Obviously, the lagging aspect of this approach requires forgoing the profits of early price moves - First Quantum's stock rallied from its $12.75 low in late November, 2008, and was trading at $48 before it was a Bullish Crossover in the spring. Trend followers, though, are happy with the gains since then.

Shares of Google Inc. also performed well and showed that its price trend was developed enough to move the stock aggressively above the $500 level to its current price of $618. Like First Quantum, Google's stock had rallied substantially from its low before turning Stock Trends Bullish in May. However, Google's shares have been especially strong in the fourth quarter as it has handily outperformed the broad market and has hit new 52-week highs in 10 of the last 12 weeks. The stock is up 40 per cent since it was profiled as a buy in early August.

Some trades failed after showing moments of promise, including the July profile of Research In Motion Ltd. It advanced 20 per cent in the third quarter, but retreated enough by late September to hit a sell condition for the trade. By the end of October the stock seemed destined to fall into a bearish or flat trend, and a second sell column suggested it was time to step away from the stock. Subsequently, the immediate selling pressure subsided and RIM found some new believers as the share price recovered lost ground in December. Nevertheless, the stock remains in a Stock Trends Bearish trend despite the recent rally.

Power Corp. also suffered a fourth-quarter swoon after showing promise following the profile of its stock in late June. This trade would have been closed in October when its Stock Trends indicator changed to Weak Bullish. It has since recovered to the level it had cleared before its October retreat.

The trend trading described in these columns generally requires a more active investor to monitor for changes in the share price and take appropriate action when a trend line has been violated. Like others in this group of profiled stocks, the Power Corp. trade demanded that investors sell if the stock moves too far against the trend. Sometimes that means losing potentially greater returns. Sometimes it means taking a loss. Either way, it should underscore the importance of managing downside risk on every trade.

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Eight months of profiles

Skot Kortje has been analyzing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995. For more go to Stocktrends.ca