Taking a technical view paid off in 2010

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 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 that has enough empirical support 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
moves. Some investors may find a recommendation to buy 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 Corp.,
up 89 per cent, and Alberto-Culver, up 26 per cent. However, several
other recommendations also proved stellar. Siemens AG, up 33 per cent,
Pan American Silver, up 43 per cent, and Total Energy Services, 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.

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RECOMMENDATIONS IN 2010