Taking a technical view paid off in 2010

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As the new year begins, it's time to look back on how this column's recommendations performed in 2010.

My column highlights stock market trends that investors can use in identifying trading opportunities. The analysis is based on the Stock Trends indicators that appear in the TSX sector stock listings published each Saturday in Report on Business. These indicators help identify changes in long-term price trends, as well as support areas.

Readers should understand that trend analysis implies certain assumptions. Technical analysis, in general, is based on the belief that stock prices move in predictable patterns - an assumption that is debatable but provides enough empirical evidence to inspire many investors to trade solely on technical indicators.

Stock Trends' indicators employ longer-term parameters (average prices for periods of 13 weeks and 40 weeks), as well as price momentum and volume measurements over a three-month period.

As a result of how they're calculated, these trading signals lag market movements. Some investors may find buying a stock that has already risen, say 30 per cent, to be a late call. However, technical analysis can still point to opportunities because the price momentum and trend characteristics of a stock - even a stock that has already advanced 30 per cent - often support a rally to even higher levels.

Last year was a good year for technical trend traders, and it shows in the results of some of the trades featured here. There were 46 stocks profiled in this column in 2010, although 17 trades were closed out by unfavourable midyear moves.

The average loss on unsuccessful "buy" recommendations was about 10 per cent when factoring in transaction costs. Most of these trades were in the first half of the year when the market retreated. The most untimely "buy" recommendation was Gluskin Sheff + Associates at the beginning of April.

There were also nine "sell" recommendations based on evolving market trends at the time of the Stock Trends column. Some of these recommendations were very timely, including the spring warnings on DragonWave and First Quantum Minerals Both stocks have recovered in recent months, but the "sell" signals highlighted the downside risk that ailed both stocks in the second quarter.

Many of the stocks profiled in the second half of the year were chosen because of technical signs that price resistance levels would give way to the sector trends identified in the column. Generally, the objective of these trades was a modest 10- to 15-per-cent upside.

However, some trades were expected to deliver more. And they did. There are still 27 "buy" stocks profiled in 2010 that remain as open trades. Most have been profitable. The average return on these trades is about 18 per cent after transaction costs.

Timely buyouts helped a couple of recommendations - Western Coal up 89 per cent, and Alberto-Culver up 26 per cent. However, a number of other recommendations also proved stellar. Siemens AG up 33 per cent, Pan American Silver up 43 per cent, and Total Energy up 48 per cent, are the best of the group.

As we enter 2011, bullish sentiment is strong. Canadian equities enjoyed a particularly strong final quarter of 2010 thanks to a powerful move by mining stocks and a resurgent energy sector. The S&P/TSX mining index rose 27 per cent, with many small-cap mining stocks riding a wave of commodity speculation.

Reflecting the bullish sentiment fuelling junior miners is the Venture exchange index, which outperformed the S&P/TSX composite by 21 per cent in the final quarter of 2010. The question now is just how far this bubble builds before it bursts. Stock Trends will likely focus on more defensive trend trades in the coming quarter. In the end, though, the market dictates the storylines - and the stock picks - of this column.