• Investing
  • Stock
Round Table Thoughts
  • Economy
  • Editor’s Pick
Home Stock Three Technical Tools to Minimize Endowment Bias
Stock

Three Technical Tools to Minimize Endowment Bias

by February 10, 2025
by February 10, 2025 0 comment
Share
0
FacebookTwitterPinterestWhatsapp

Have you ever held on too long to a winning position?  You watch as that former top performer in your portfolio slows down, and then rotates lower, and then really begins to deteriorate, and you just watch it all happen without taking action?

If the answer is “yes” then you have fallen victim to one of the more frustrating of the behavioral biases called “endowment bias”.  Basically, we feel unable to let go of this position because of our emotional attachment, and we hold on to a losing position despite very clear technical signs that we should do otherwise!

Today I’ll share three technical analysis techniques that I’ve found helpful to cut my losses, minimize the crippling impact of endowment bias, and preserve my portfolio through challenging periods.  

When In Doubt, Follow The Trend

The biggest issue I find when it comes to endowment bias is that investors simply ignore clear signs on the chart.  As my mentor Ralph Acampora once told me, “Analyzing the chart is the easy part.  Actually doing what the chart tells you?  That’s the tough part!”

The chart of Intel Corp. (INTC) in early 2024 shows how a stock can rotate from a period of accumulation to a period of distribution.  In late 2023, INTC was making higher highs and higher lows, the price above two upward-sloping moving averages.  The RSI was mostly above the 40 level, representing a bullish range for this momentum indicator.  The relative strength (bottom panel) was steadily trending higher, demonstrating that INTC was outperforming the S&P 500.

By April of 2024, literally all of the previous bullet points had changed from bullish to bearish.  INTC was now breaking down through moving average support, the moving averages were beginning to slope lower, the RSI had moved to a bearish range below 60.  

Think of technical indicators like a checklist, and go through the process of evaluating each indicator on the chart to determine whether the current reading is bullish or bearish.  And when you get to a point when the bearish evidence outweighs in the bullish, then move on to better opportunities!

Relative Strength Can Bring Additional Clarity

Sometimes a stock will stop going higher, but instead of breaking down it enters a new consolidation phase.  Microsoft Corp. (MSFT) showed this particular phenomenon in 2024, as it entered a trading range between $400 and $460 after a new all-time high in July.

Now even though the price trend was now sideways, note how the relative strength line began to trend steadily lower.  This pattern emerged because MSFT was holding support, so the price trend was still in decent shape, but other stocks were continuing to pound out a strong second half to 2024.

When you’re holding a stock with deteriorating relative strength, your “opportunity cost alarm” should be going off big time.  Basically, while you’re not necessarily losing money holding this particular stock, there are other stocks out there that are still moving higher.  So by tying up your capital in this particular stock, you’re missing out on other opportunities to outperform!

Institutional investors tend to be laser focused on relative strength, as that is pretty much exactly how they are evaluated as active managers.  So think like an institutional investor, and if your charts begin to feature weakening relative strength, look around for other places to outperform.

Divergences Are Often An Early Warning Signal

Parts of the technical toolkit can be used more as leading indicators than lagging indicators.  I’ve found bearish momentum divergences to provide excellent early warning signals, because they will raise a red flag while the primary uptrend is still in place.

The chart of Synchrony Financial (SYF) still appears in decent shape, with a pattern of higher highs and higher lows continuing through early 2025.  But notice how the RSI has actually been making lower peaks since early November, despite the stronger price action?

SYF and similar names will usually find a place on my “potential topping patterns” ChartList, helping me focus on charts that are still going higher yet demonstrating similar characteristics to previous market tops.  I’m happy to still own a chart like SYF as long as the price keeps showing strength, but the bearish divergence tells me to be ready to take profits if the impending drop becomes a reality.

Mindless investors ignore clear signs of price deterioration because endowment bias prevents them from admitting a change in the technical evidence.

Mindful investors have a consistent process for evaluating their holdings, and are more easily able to admit when a chart is no longer helping them achieve their portfolio goals.

RR#6,

Dave

PS- Ready to upgrade your investment process?  Check out my free behavioral investing course!

David Keller, CMT

President and Chief Strategist

Sierra Alpha Research LLC

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.  

The author does not have a position in mentioned securities at the time of publication.    Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

You Might Also Like
  • DP Trading Room: Long-Term View of the Dollar
  • Stock Market’s Spectacular Q3: Highest Sector Performer is Utilities
  • GNG TV: GO TRENDS Emerging Across the Globe!
  • Week Ahead: NIFTY May Stay Ranged; Trending Moves To Occur Only If These Edges Are Breached
Share
0
FacebookTwitterPinterestWhatsapp

previous post
DP Trading Room: Gold Hits Another All-Time High
next post
McDonald’s revenue disappoints, as U.S. sales see worst drop since pandemic

You may also like

When Calendar Ranges, Leadership, Momentum and Price Align

September 21, 2023

Double Top on Semiconductors (SMH)

July 18, 2024

Stay Ahead Of The Curve To Make More Money

July 16, 2023

Top Five Charts of 2023 #3: Market Breadth Indicators

December 21, 2023

Sprouts Farmers Market: A Hidden Gem on the Corner of...

January 4, 2024

Can the S&P 500 Rally Without Tech?

November 27, 2024

MEM TV: Tech Stock Decline Spooks Market

July 22, 2023

Week Ahead: NIFTY Hangs In Balance Near Crucial Supports; Important...

March 19, 2023

DexCom Stock Rises From the Ashes: A Breakout You Can’t...

January 17, 2025

Momentum Madness and Nasdaq 100 Stocks

December 15, 2023

    Stay updated with the latest news, exclusive offers, and special promotions. Sign up now and be the first to know! As a member, you'll receive curated content, insider tips, and invitations to exclusive events. Don't miss out on being part of something special.


    By opting in you agree to receive emails from us and our affiliates. Your information is secure and your privacy is protected.

    Recent Posts

    • Krispy Kreme stock plunges after doughnut chain pauses McDonald’s rollout, pulls outlook

      May 8, 2025
    • Don’t Buy Robinhood Stock… Until You See This Chart Setup

      May 8, 2025
    • UnitedHealthcare sued by shareholders over reaction to CEO’s killing

      May 8, 2025
    • The Unpredictable Stock Market: How to Make Sense of It

      May 8, 2025
    • AMD CEO calls China a ‘large opportunity’ and warns against strict U.S. chip controls

      May 7, 2025

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be...

      June 27, 2024 2,633 views
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as...

      August 9, 2024 2,339 views
    • 3

      Biden appointee played key role in recruiting Chinese...

      June 25, 2024 2,320 views
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful...

      July 10, 2024 2,303 views
    • 5

      Harris VP pick spent years promoting research facility...

      August 29, 2024 2,186 views

    Categories

    • Economy (7,009)
    • Editor's Pick (2,066)
    • Investing (538)
    • Stock (2,530)

    Popular Posts

    • 1

      Trump-era China sanctions ended by Biden may be revived under new House GOP bill

      June 27, 2024
    • 2

      Walz’s honeymoon with China gets fresh scrutiny as Harris camp blasts ‘lying’ critics

      August 9, 2024
    • 3

      Biden appointee played key role in recruiting Chinese businesses to Delaware: ‘Longtime friends’

      June 25, 2024
    • 4

      Shein’s global ambitions leaves some cybersecurity experts fearful of Chinese spy threats

      July 10, 2024
    • 5

      Harris VP pick spent years promoting research facility that collaborated with ‘Chinese military company’

      August 29, 2024

    Latest News

    • Krispy Kreme stock plunges after doughnut chain pauses McDonald’s rollout,...

      May 8, 2025
    • Don’t Buy Robinhood Stock… Until You See This Chart Setup

      May 8, 2025
    • UnitedHealthcare sued by shareholders over reaction to CEO’s killing

      May 8, 2025

    Categories

    • Economy (7,009)
    • Editor's Pick (2,066)
    • Investing (538)
    • Stock (2,530)

    Disclaimer: RoundTableThoughts.com, its managers, its employees, and assigns (collectively “The Company”) do not make any guarantee or warranty about what is advertised above. Information provided by this website is for research purposes only and should not be considered as personalized financial advice. The Company is not affiliated with, nor does it receive compensation from, any specific security. The Company is not registered or licensed by any governing body in any jurisdiction to give investing advice or provide investment recommendation. Any investments recommended here should be taken into consideration only after consulting with your investment advisor and after reviewing the prospectus or financial statements of the company.

    Copyright © 2024 RoundTableThoughts.com. All Rights Reserved.

    Round Table Thoughts
    • Investing
    • Stock
    Round Table Thoughts
    • Economy
    • Editor’s Pick

    Read alsox

    Where is the Market Finding Joy?

    March 20, 2023

    MEM TV: Markets Stuck Amid Fed...

    February 18, 2023

    PayPal Stock Price Breaks Out: How...

    August 26, 2024
    Sign In

    Keep me signed in until I sign out

    Forgot your password?

    Password Recovery

    A new password will be emailed to you.

    Have received a new password? Login here