The Maginot Line For Stocks: What Is It Telling Us?

by Michael Clark

I hesitate to use the phrase "Maginot Line". For those of you too young to remember the Maginot Line, it was the impenetrable line of defense separating Germany and France, which provided peace for France, so the French thought anyway, until Hitler's panzer blitzkreig shattered that illusion.

So I am suggesting that an indicator I have created is a kind of Maginot Line. This seems like a backhanded compliment. If it is an illusion, then it is a lie, it does not prevent a loss by invasion. It was, however, a barrier until the war actually began. My indicator is like this also. It pictures a safe situation, until the bottom drops out. Once this line is crossed, then one knows the peace (and profit) has ended.

Let me say this about my Maginot Line, which I calls CGTS Prophecy, putting a much less negative spin on its denominator. It includes just about all of my important indicators, all spun together. I could say something about my loss of faith in fundamental indicators also -- since fundamentals are not what they used to be, with NIRP, ZIRP and buybacks. But it is historically true that companies have always shaved the truth, twisted returns, hidden losses with nonrecurring costs that recur and recur. In truth, companies pay accountants millions of dollars a year to hide fundamental problems and to magnify fundamental victories. There is so much untruth in company reports, especially today, how could anyone base investment on this sea of distorted figures. For those interested in pursuing this:

The point is, companies don't want you to know the truth, unless the truth makes them look good. And it is difficult to know what is true and what is false -- they are very good liars.

As the stock markets begin to fall apart, lying companies will be exposed more and more. This is why investors need a kind of Maginot Line, something visual to help them map their way through the darkness.

Let's look at a stock that is very well loved and also hated, Apple (AAPL) Computer. CGTS Prophecy (gold line) appears in the bottom pane. It looks like a basic oscillator indicator at first -- but the deep red lines illustrate to two points of technical interest: the top line is a very important support line (at -7); the bottom red line is an important resistance line (at -19). Many times in the life of a price move, the price moves down to and rests on the -7 line. This is our Maginot Line. As long as -7 holds, we continue to have peace. But if this support level breaks, then a war ensues -- that is a war against investors' peace of mind. The way an investor can use this is to monitor long-term trades. Don't sell unless the Maginot Line is breached. In the Apple example below, buy signal was given April 2013 with Apple at 56 -- it is still a buy, a hold, at 115.52. The Maginot Line in still holding.

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Disclosure: None.

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