# Analyzing Price Upsides and Downsides

Common sense and experience tells investors that a good time to buy a stock is when prices are rising on the upside. Buy low and sell high is your goal. Yet, many investors buy when prices are on the downside because they reason that a stock must be a "good buy" if it has gone from, for example, \$50 to \$30. Often this so-called bargain turns into a very bad buy as the stock price continues to fall.

This article describes an analysis of buy and sell returns developed by Richard Howard of buyupside.com that computes the percent return of every buy and sell return for a selected price series. With this analysis you can determine the number of buy and sell returns that make money and the number of combinations that do not. Therefore, the analysis produces easy-to-understand, verifiable quantitative data which show that buying on the upside is a winner's game and buying on the downside is a loser's game.

## How the Buy and Sell Returns Analysis Works

A buy and sell return occurs when an investment is purchased on a given date and time and then sold on another date and time. The interval between the purchase and sale can be any unit of time.

A buy and sell return results in a percent return that is a profit, loss or break-even.

Percent Return = ((sell price - buy price) / buy price) * 100.

Assume a price pattern defined by a period of rising prices (upside that ends with the peak price) and a period of declining prices (downside that begins with the first price after the peak price). For such a pattern there are three trade or return types:

• Buy on the upside and sell on the upside returns
• Buy on the upside and sell on the downside returns
• Buy on the downside and sell on the downside returns

The number of buy and sell returns for a series of N upside and downside prices is N*(N-1)/2.

The number of buy and sell returns for the upside and downside trade types are:

NU*(NU-1)/2 for buy on the upside and sell on the upside where NU is the number of prices on the upside.

NU*ND for buy on the upside and sell on the downside where NU is the number of prices on the upside and ND is the number of prices on the downside.

ND*(ND-1)/2 for buy on the downside and sell on the downside where ND is the number of prices on the downside.

## Example

Below is an example of a sequence of ten prices, six of which are the upside and four are on the downside.  There are:

• 45 returns for all prices
• 15 buy upside and sell upside returns
• 24 buy upside and sell downside returns
• 6 buyupside and sell upside returns

## Buy and Sell Return Analysis of a Cyclical Stock

The following example is for Kulicke & Soffa (KLIC), a cyclical semiconductor equipment stock. The price chart shows the weekly closing prices for KLIC from September 9, 1996 to October 5, 1998, which is one complete price cycle.

The cycle included 109 weekly closes for 5,886 (109*108/2) buy and sell combinations of which 2,501 (42.49%) were winners and 3,385 (57.51%) were losers.

Return Summary

## Number Prices

109 52 109 57

5,886 1,326 2,964 1,596

## # Winners

2,501 1,213 1,068 220

## # Losers

3,385 113 1,896 1,376

## % Winners

42.49% 91.48% 36.03% 13.78%

## % Losers

57.51% 8.52% 63.97% 86.22%

## Average Return

10.73% 73.96% 2.06% -25.70%

## Lowest Return

-78.84% -25.11% -78.84% -78.59%

## Highest Return

515.09% 515.09% 508.11% 67.03%

## 2-Dimensional Percent Returns Chart

The color-coded display of the returns for the 5,886 trades delineates the three trade types by color. You can see that most (91.48%) of the buy upside and sell upside trades (green) are winners and fall above the red zero percent return line on the chart. These trades result in the largest percent gains. Most (86.22%) of the buy downside and sell downside trades (red) are losers and fall on or below the red line. The buy upside and sell downside trades (blue) are distributed over much of the chart area. But most (63.97%) of these trades are losers.

## 3-Dimensional Percent Returns Chart

The following 3-dimensional chart displays the pattern of percent returns for the 5,886 buy and sell combinations for the KLIC price series. Each profitable trade appears in green and each unprofitable trade appears in red.

The chart shows the returns of each of the 2,501 (42.49%) winning trades (green) and the 3,385 (57.51%) losing trades (red) as they are related to their buy and sell dates. Most of the winning trades in green occur for the buy upside and sell upside trades. Most of the losing trades in red are buy downside and sell downside trades and some losers are buy upside and sell downside trades.

## How to Read the 3-Dimensional Percent Returns Chart

The buy axis runs from the back (1996) to the front (1998) of the chart. The sell axis runs from left (1996) to right (1998). The buy axis and the sell axis form the floor of the chart. No trades can occur in the gray area because the buy date is after the sell date or the sell date is before the buy date. The pattern of positive returns looks like a mountain range whose elevations are directly proportional to the magnitude of the percent returns. The negative returns lie below the floor and appear as shallow scooped-out valleys. The back left corner of the floor is the return for the first (lowest) buy price and its first sell price. The back right corner is the return for the first buy price and the last sell price.

Buy prices start at the lowest price of the series and increase to the peak along the buy price axis. After the peak price, the buy prices tend to decrease. The first (lowest) sell price is at the left side of the sell axis. Sell prices increase to the peak sell price and then decrease to the last sell price which is located at the right side of the sell axis.

The buy upside and sell upside trades are in the back left of the chart. The buy upside and sell downside trades are in the back right. The buy downside and sell downside trades are in the front right of the chart.

If you track the returns for one buy price, you will see the returns move up and down as the sell prices moves from left to right. The highest peak on the chart is the return for the first (lowest) buy price and the peak sell price. As you move from back to front on the buy axis, there are fewer trades for each buy price. And you can see the ridges of returns across sell prices for a given buy price.

The chart also shows the returns for a given sell price as you move from the first to the last buy price. For example, locate the peak return and follow the ridge of returns from the back to front of the chart. The peak return occurs for the first buy price. The lowest return, located next to the diagonal edge, occurs for the buy price just before the peak sell price. For all sell prices, the returns tend to decrease as buy prices increase on the upside.

## Winners and Losers Map

Another way to view the winning and losing trades is to eliminate the relief from the 3-dimensional chart and simply plot all the trades as if you where looking straight down at the 3-dimensional chart. This perspective produces a flat 2-dimensional chart where areas of green represent winning trades and areas of red represent losing trades. In the KLIC winners and losers map 42.49% of the area is green and 57.51% is red.

## 3-Dimensional Chart of the Buy Upside and Sell Upside Trade Type

The 3-dimensional chart of the 1,326 buy upside and sell upside trades shows the 1,213 (91.48%) winners in green and the 113 (8.52%) losers in red. Most of the losing trades were short-term trades clustered near the diagonal axis. The highest returns occur for the earliest buy dates (lowest prices) and the dates (highest prices) near the peak of the upside. As the buy prices increase on the upside, the returns decrease.

## 3-Dimensional Chart of the Buy Upside and Sell Downside Trade Type

The green areas show the 1,068 (36.03%) winning trades and the large red area shows the 1,896 (63.97%) losing trades. The largest percent returns occur for the lowest buy prices early in the upside that are sold as the highest prices just after the peak. And all of the early upside buys are winners as shown by the continuous green area at the back of the chart. As the upside buy prices become higher, fewer and fewer of the downside trades make money.

## 3-Dimensional Chart of the Buy Downside and Sell Downside Trade Type

The large area of red shows the 1,376 (86.22%) losing trades for the buy downside and sell downside trade type. Only 220 (13.78%) trades were winners. Most of the winners appear in the large cluster of buys and sells that occurred during the price rebound in early 1998. The other green clusters represent short-term trades associated with brief price rises on the downside.

## Analysis of Five Recurring Cycles

Since 1992 Kulicke and Soffa has had five price cycles, each with a distinctive upside and downside. The price chart of daily closes from July 7, 1992 to October 15, 2004 shows the completed cycles 1 through 5.

The table of percent winners shows the percent winners for each trade type for each cycle. The buying and selling on the upside is almost always profitable and buying and selling on the downside is mostly unprofitable.

Percent Winners of Five KLIC Cycles

## 1

75.15% 93.86% 68.04% 18.36%

## 2

68.09% 93.26% 81.70% 6.99%

## 3

42.86% 90.40% 36.32% 13.70%

## 4

54.26% 81.58% 63.78% 35.50%

## 5

65.42% 85.15% 76.01% 9.88%

The next two tables include a tabulation of the duration and returns for the upside and downside for each cycle. The upside and downsides durations for cycles 2, 3 and 5 were approximately the same number of days. Cycle 1 had a very brief downside relative to its upside. And cycle 4, the bubble cycle, had a very long downside relative to its upside. It had the longest duration of the five downsides. All upsides had impressive total gains and the total returns per day were similar.

Upside Durations and Returns

## 1

444 685.57% 1.54%

## 2

462 809.43% 1.75%

## 3

364 544.59% 1.50%

## 4

518 704.43% 1.36%

## 5

404 766.67% 1.90%

The downside losses were approximately the same for cycles 1, 2, 3 and 5. Cycle 4, the bubble cycle, lost 95%, the highest of the five cycles. The loss per day was very high for the first cycle and relatively low for the bubble cycle because its downside lasted so long.

Downside Durations and Returns

## 1

207 -67.98% -0.33%

## 2

415 -79.99% -0.19%

## 3

392 -81.87% -0.21%

## 4

944 -95.33% -0.10%

## 5

352 -68.75% -0.20%

## Percent Return Charts of Five Cycles

The percent returns chart for the five cycles shows the winning buy and sell combinations in green and the losers in red. The chart shows the peaks and valleys of the percent returns for every buy and sell combination for the five cycles. Of the 11,325 monthly buy and sell combinations 7,360 (64.99%) were winners and 3,965 (35.01%) were losers.

I used the monthly closes because they produce the best looking 3-dimensional chart for a long price series. The resolution is very poor for 3-dimensional charts that include too many data points. Also the percent winners and percent losers have slightly different values for monthly, weekly and daily closes. But the differences are not large enough to be significant.

## Winners and Losers Map of Five Cycles

The winners and losers map shows the pattern of the winning and losing buy and sell combinations. The vertical areas of red represent the losing trades that resulted from selling at and around lows of the cycles. For example, the two large vertical red areas at the right side of the map represent the losing trades resulting from selling at or around the lows at the end of the fourth and fifth cycles.

The horizontal patterns of red represent losing trades resulting from buying at high prices and selling at many different sell prices.

## Summary and Conclusions

The buy and sell return analysis shows that buying and selling on the upside gives investors a very high probability of making money. Even buying on the upside and selling on the downside can be very profitable. But buying and selling on the downside almost always guarantees that you will have difficulty making money. The problem with buying on the downside is that no matter what price you pay, prices are likely to fall some time after you buy.

If you buy near the bottom of the downside, you could make money on the upside of the next cycle. But if you buy at relatively high prices on the downside, you might never make money or have to wait a long time to make money on the next cycle. Investors who bought just after the peak of the 2000 bubble in technology prices will wait for years or perhaps decades just to break even much less make a profit.

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