Have you ever been in a trade and became distorted during trade management by listening to others commenting on “fair value,” fundamental analysis, news, rumors, management, etc., as opposed to just reading the technical analysis messages of supply and demand from the charts?

We all have, so I’m going to take us on a trip back in history to help you internalize the differences in using technical analysis to profit and not be distorted by fundamental analysis and opinions of others to help keep you focused on the only thing that matters to profit.

As investors and traders, we buy and sell any financial instrument (stocks, options, bonds, ETFs, futures, commodities, currencies, Bitcoin, etc.) – which we simply refer to as our “merchandise” – and profit by closing them out for a profit.

How Do You Calculate Proper Market Value of Stocks?

How does one measure the market value – of anything on planet earth?   The fundamentalists and financial analysts will give you a very complicated answer including discounting expected cash flow, growth expectations, etc.

To us market technicians the answer is simple: by a willing buyer and willing seller.  The last price on the chart was the market value.

At Master Trader, we use the technical analysis of chart patterns on multiple time frames and market internals to determine supply and demand and, thus, whether to be a buyer or seller of any instrument. Master Trader Technical Strategies – MTS details every step to do that.

What Was United Airlines Worth in Bankruptcy?

I have been trading over 25 years and wanted to share a compelling story with you that I lived through to help internalize this concept for my trading students and me.

Michael Santoli wrote in Barron's years ago, “Why does UAL [United Airlines, then trading under stock symbol UALAQ since it was delisted] stock trade at $1.40?”

It was actually a great question. It was a financial mess, particularly with the Fed's then denial of its loan guarantee. That would require it to seek even greater concessions from its unions as it tried to emerge from bankruptcy.

UAL's web site stated: “We believe that UAL's presently outstanding equity securities will have no value and it is expected that those securities will be cancelled under any plan of reorganization that we propose.”

So that question begged the following question: Why would a “willing buyer” buy UAL at $1.40/share, giving a value of about $150 million, when the underlying Board of Directors claimed it was worthless?

It was perceived or actual value, period! The buyers might have believed that there would be some recovery in bankruptcy, possible buyout, or residual liquidation value.

Accountants tout all kinds of value: fair market value; cash flow; book value; liquidation value, etc. Because of the accounting standards allowing for the capitalization of goodwill, book value should be meaningless to a trader in my opinion (hint: beware of the media boasting book value far under current stock prices).

Real Market value is all we care about, which is the last trade of the stock (i.e., willing buyer and seller).

Liquidation value is important in my opinion to establish a floor in the event of a fire sale (i.e., sell all assets, pay all liabilities, distribute remaining assets to owners, and close the doors). But under this definition, it should always be at least equal to fair market value.

Were the buyers of the 1.2 million shares/day (average 30-day then volume) of UAL stupid?  I have no idea. Perhaps they were or perhaps they were the smarter bunch. That was the low area for UAL so in retrospect those buyers were the smarter ones!

Despite all of the bearish news surrounding UAL at the time, because of the bullish pattern of UAL on multiple time frames, we suggested a core long entry on UALAQ at $1.63 in February 2004 on a Master Trader Breakout from a bullish weekly consolidation.  It takes confidence – and some bravery – to be bullish in the face of such pessimism.

Historically, that is the time to buy – “when there is blood on the street,” as the saying goes – when you can buy at basement prices when investors are dumping “their merchandise.”

You know the story.  UAL emerged from bankruptcy.  Although it went much higher, we as traders were happy to sell our shares 12 trading days later for $3.48, booking a cool 113% on an alleged “valueless” company!

If you want to make money trading, focus on the charts – they don’t lie!

Feel free to email me with questions or comments.  Happy trading!

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Dan Gibby

Managing Director