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Is the Top Mightier than the Bottom?
Technicals are a heresy in mainstream
investing--they don't really teach them in school--but everyone that
comes face to face with that beast called the market sooner or later
figures out what they are. Just like a fundamental analyst might
disagree with another fundamental analyst about a stock, the same
goes with technicals; people don't really agree on them either.
I have seen a professional investor
who makes fun of technicals secretly count projected moves on his
Bloomberg terminal and then rationalize those moves by throwing in
P/Es and book values. I personally have never been able to base my
investment opinion on a chart without knowing what is going on behind
it, but that kind of behavior struck me as particularly disgusting.
And I don't think it's an isolated case...
What is going on behind the chart of
the Nasdaq 100 is an inventory rebuilding cycle coupled with a
financial system that is still operating on life support so it can
facilitate that inventory rebound. Final demand? That may be decided
in 2010...
This is a very strong rally on very
weak volume, which is a problem. No, you don't make money on volume.
And, yes, the market can be irrational longer than you or I can be
solvent, both to the upside and to the downside....
After we have cleared up that, it looks
to me we are coming up against some formidable resistance in the Nasdaq (tech
is the leading sector in the market this year). For this market to
roll over, we need to see weakness in techs and most importantly
financials. Will we see it? I think we will know very shortly...
I seriously doubt the QQQQ (when they
added that 4th Q to the symbol it became really annoying)
will keep trading above 40 for very long. I think a move to the low
30's is in order, but I can give no guarantees (no one can give you
those). It looks to me we are retesting the breakdown point from the
fall, which also happens to be the mother of all head and shoulders
tops in the Nasdaq. We may soon be due for retesting the breakout
point from April-May, which is about 33-34...
How soon? I think we will know in a
couple of weeks (latest after Labor Day), if that setup is valid.
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Amoung Forex traders fundamentals are called "funnymentals".
The problems with technical analisys is the fact that a few people dedicate time or have enough guts to really understand it. Add to the fact that 99.9% of the self proclaimed gurus, teaching it out there don't have a freaking clue of what they are talking about and you start to get a idea why techies have a bad fame.
When I started in this business I use to trade fundamentals and I almost lost my shirt.I'm trading 90% technical 10% fundamentals for a while now and I couln't be happier :)
First question is, why are you using simple moving averages?
Most people, including those on CNBC, etc. who talk technicals, probably could not answer either, if asked. And the answer is, you simply want to use them - that's part of your process of how to decipher what the market has done and what it is likely to do. You are trying to anticipate what is going to happen to the $NDX near term, and that is what a technician is supposed to do. And of course, you back it up with a real trade.
Rather than be annoyed, use these technicals to your advantage, put a bit of time into it. Are you familiar with William O'Neil (IBD)? His philosophy is that during a bull rally, you buy fundamentally strong stocks, but you use technicals for entry AND exit. So even to someone like him, he's timing his trade on technicals.
If I find anyone annoying, it's the technicians who work for the big brokerages and who aren't very good at all - and I can name quite a few I've seen on TV.
i don't think it's either or....
what i would like to know is if any
peer reviewed research
has been done to establish the reliability
of ta....and then again i am not sure that
an agreeable test meeting most knowledgeable
people's satisfaction could be devised....
also not sure of the validity of ta in managed
markets....
reminds me of the wsj series from a few years
ago where they compared the results of throwing
a dart at stocks vs. asking professional
analysts....the results were not flattering
to the professional analysts....
You're probably right, since technicians use methods that they feel best fit their philosophy of the market.
I like to see the market as this big wave - unpredictable and out to beat the crap out of every ego who thinks it easy to ride it; but you can do only one thing, and that's obtain a probability and try to reap from that. Remember, we cannot trade what a chart is telling us happened last week, which is certain, and we can only deal in probability.
This being said, there is one study done by an author and TA (Kirkpatrick) who compared 3 methods - FA recommendations, price/sales, and TA-based relative strength & moving average, and his study found that the 3rd was most accurate in terms of garnering profits.
There will always be doubters but that is fine by me.
See Mebane Faber of Cambria Investments blog
http://www.mebanefaber.com/timing-model/
200 dma works on all markets over long periods of time.
VRCMT
I know MF; and the 200-dma is standard intermediate term for institutional investors - it translates to a 40-wma on a weekly chart and a 10-mma on a monthly chart
ST mean reversion on a monthly chart is 20-mma, and LT is 50-mma, which is what both the S&P 500 and crude oil work on - and note, the latter has been testing its 50-mma; and the 50-mma provided support to the S&P 500 for both the 1987 crash and the 1990 mini crash
And if you want to translate 50-MMA on a weekly, use 200-wma
bbtrader, would you recommend some good resources on TA? There're way too many books about it out there.
Andy,
I am with you on this. Technicals are important but i cannot shut off the side of my brain that seeks fundamental understanding.
I like qqqq's set up. As for timing, mine has been hit and miss for the last 3 ms so i don't dare hazard a guess.
Eventually, gravity will take hold and prices will recouple (at least i keep telling myself that). September/October seems like the best time of the year (historically speaking) for such an event.
sleazy linking practices; borderline fraud ..http://www..
hat tip: gay porn and deceitful, slimy operators
Is your article suggesting spesific questions ?
Anyways...I would through those MA on the trash keep the divergence and trade PA at the resistance line you have there.
Sounds good?
My reply did not show up...hope you guys can fix it...
50% Fib retracement to the 40.385 level completes the recovery move.
Afork also shows a resistance level @ 41.24
Simple trend line shows a 41.13 resistance.
3.10.08 low of 41.22 also confirms.
with disipating vol. I find it hard to see an upward move.
Funnymentals are selling the risk trade fairly hard tonight on bad Chinese Industrial Production. And then we're watching today's AUD/USD low to see if it can hold as support!
p.s. not optomistic - USD/JPY stairstepping lower to retrace Friday's pop. That's a lot of 'air' down there.
Read "techical analysis of stock trends" by Edwards and Magee. It's solid.
Read "techical analysis of stock trends" by Edwards and Magee. It's solid.
Nice to hear someone who's got their trading philosophy in order - successful participation in the markets requires a good foundation of TA.
I consider myself pretty a hardcore technician, and thru it I've been able to make sense of what the market has done and will likely do, and even better I've been able to just hang with one single stock and trade it well.
And while I can see the $NDX getting toppy at the moment, I should say that the energy sector is the real underperformer at the moment - the oil services showing increasing weakness and the NG E&Ps showing the most resilience.
What are some must read books (websites) for TA?
For starters use stockcharts.com; for books, there are many, from general books like 'dummies' to more advanced, but stockcharts has an online bookstore as well.
I started long ago w/ "Trading For a Living" by Dr. Alexander Elder; old, but very insightful about the need to manage oneself - since successful trading has a lot do do with one's mental makeup. Others I like are "Technical Analysis" by Kirkpatrick/Dahlquist, and "Technical Analysis of the Financial Markets" by John Murphy. The Magee book mentioned is also good and also unique in that it has some very old charts - a bit of history, if you will.
Excellent article and discussion.....
My feeling is that indicators and fundamentals have a place........ and the decisions are made using price action.
Each trader arrives at his entries and exits using his own process, hopefully that process gives good results.
Here is your fundamentals: The Obama administration has to ram through it healthcare proposals in the next month.
To get them through without looking like the total fools that they are, the market needs to be kept floated. It cannot be allowed to sink. Anything and everything will be used to save the healthcare plan.
Don't fight the fed and the treasury.
A Wanniski Moment. Everyday the appearance of Delay and Confusion (Thank you, Thomas The Tank Engine) yields a Quick Kick 'til tomorrow. When the votes are solid and our Alt-A, Option ARM Congress decides to drive us over the cliff, it's the top of the Grand Canyon heading down - fast.
"...'N here we see that the Second Derivative of Velocity is *Pffft*..." All that'll be left is the little puff of smoke at the bottom.
Good job Printfaster.
Right on , agreed...
Read "techical analysis of stock trends" by Edwards and Magee. It's solid...agreed. that's a good book.
just requested it at univ library, hope 3 weeks is enough to get through it, going through CFA program right now, has zilch on TA
After what we have experienced in 2008 and 2009, fundamentals have been totally discarded by most saavy market participants.
Most will be buying and selling on technicals only.
Look at those who argued for "Peak Oil", and crude promptly crashed from $145 to $36 in the biggest, fastest, steepest commodity crash in world history. T. Boone Pickens' fund was nearly wiped out.
And look at the REIT's and junker retail stocks more than doubling or quadupling off the March lows in the face of a generational depression, record unemployment, and collapsing real estate. Various macro funds were decimated.
As long as the 21-day EMA's hold, the bull is on. Once the 21-day is breached, then the momentum players will be shorting en masse.
First ones to watch for a downside break: OIH and XLE
Nice work here - a great example of how to use an EMA - note it is set at 21-days, which is tied to a monthly cycle AND is showing that prices are reacting to it as a mean reversion. The sideways movement is especially important since it usually results in a strong move up or down.
I like your comments, your charts even more.
From what I hear here, there are still a lot of angry 'wanne-be-bulls'
who almost completely missed the recent early recovery rally and who
will, no actually, "are" getting into the market now.
As a result we could very well see a small bounce
before breaking the 21 EMA. Just a matter of getting the last optimists involved.
Anyway TA is a great way to eliminate all the
feelings and daily mombojumbo (aka spinning & co)
we are all subjected to daily.
Just watch and act.
I personally have never been able to base my investment opinion on a chart without knowing what is going on behind it,
And how. There's no substitute for that undefinable mix of experience, analysis, and intuition. The HR people simply can't commoditize it and so they must pay for it. I'm a bumpkin here but I try to glean a little from everyone's posts. Thanks for the pointer to Edwards and Magee, I'll look for it. I failed the math question, it didn't specifiy the modulus of the ring.
no intended disrespect to anyone's favorite theories, BUT :-) all of the publicly available info on TA is what the public (loser) uses AND TA is the only way to be consistently profitable.
solve that seeming conundrum and your on your way.
Yep, thats always been my issue. 11, your solution??
you have to trust yourself to be able to create better methods than are available to the public. that's impossible for most people because it's just too easy and alot of times it's counter intuitive. so it may take some time, but it's worth it.
in you testing, if you ever find something that is a consistent major loser, then you've gotten very lucky.
a better way to word that is what makes it so difficult (not impossible) for some is that it's too easy. the publicly available info on TA makes it much harder than it has to be.
creativity is mandatory. and i'm convinced that it's not a gift but a dormant characteristic that can be cultivated if you trust it and work with it. "Cracking Creativity" by Michalko. Koestler's book on creativity may be hard to find. try Amazon's secondary market. his style is kind of obscure to me, but i'm glad i stuck with it.
i said in another post somewhere that the only fund that i would ever want a piece of would be run by third graders. no, you dont have to be a third grader, but it would be a big help if you were willing to discount much of what you've learned since then and make up new rules for yourself. trust yourself to make your own rules. the herd mentality is a killer. so mentally stand apart.
this is generalized because i'm afraid that by being specific, i risk damaging your chance of success. i'm convinced that you can come up with your own methods that are different from mine and better. my specifics might point you away from that.
make a part time hobby of TA. no stress. just have fun with it. someday a great method will wake you up out of a sound sleep. have a pad and pen on the nightstand. after that happens, go learn the kelly criterion. after. it wont help until you become creative.
Intuitively, I would have to guess numerology with a bottom of 666 on the market.
Perhaps the top will be 9/9/09 (666 upside down) or some other agreed upon signal.
charts never lie, that's true
Sometimes my charts lie!!! Even talking to it does not change it.
"Is the Top Mightier than the Bottom?"
reminds me of the book "Topping from Below". about sm. not entirely ot.
Ok, technicals are a heresy in mainstream investing. How successful are mainstream investors?? Or asked in another way, show me an investment-teacher who got rich and teaches his method I will go and study there. Moreover, this teacher or his method must call major turning points. For I do not want to lose all paper gains by holding the investment too long. That narrows the selection down quite a bit.
Q's have pivots at 37 and 36. 36 will likely hold for now. jhmo
If ZH/TD/AD is interested, I can provide an example of some pretty interesting market action related to brokerage recommendations, and how technical situations played a major role in announcing such recommendations.
Two involve GS, one involves UBS, and one involves MS, and they occurred this past spring. I'm sure there are plenty out there, but I found these hard to forget because two involve stocks I follow, one involves crude oil which I watch carefully, and one involves the broad market and came from Bloomberg, where their writers absolutely love their "may" and "might" grammatical modals.
And my purpose would be not to slam these brokerages, but to show that it might be of benefit to readers here, to understand that technicals are more important than you might ever think.
TD has my email address and he can verify my IP, I'm just a Joe-12-Pack RI who loves beer with spicy food and anxiously awaits football season.
Interesting thread, with a little natural tension between fundamentals and technicals.
Technicals are born of trading, while fundamentals are born of investing. Has it occurred to any of you that market action became dominated at some point by trading, and that at that point the markets ceased being capital markets, and became casinos? Yes, what I am trying to say is that trading helped kill capitalism, just like a dog can tolerate a few ticks but will die from too many blood sucking vampire parasites jamming their own miniature blood funnels into anything that smells like money, while also contributing nothing. Rant about HFT but love trading? Laughable. Bitch about America not making anything but sit your own ass behind a computer and earn a good living for yourself sucking life out of the markets? Absolutely fucking hilarious. Bitch about Goldman cheating? You're fucking cheating me. Start a goddamned company making something innovative and useful. Create wealth instead of skimming someone else's.
Wanna know what's wrong with America? Look in a goddamned mirror.
Flame away...tell me how essential you are to the proper functioning of the markets. Then tell me that it was someone else that killed them and not you.
/rant
You totally need a baseball bat and a disco ball dude. Btw, do you call/email/fax all members of congress with your rants? Perhaps too busy looking in the mirror or reading forums? "The lady doth protest too much"
"You're fucking cheating me. "
like taking candy from a baby.
You are exactly correct. On a whim, a group of traders can take a good viable company that I and my partners have built and literally put us out of business based on rumors. Fundamentals are out. Technicals are out. Buzz is in. It's one big casino
If you're a good viable company then under current market conditions and suppressed equity prices, you'd be seen as a viable takeover candidate
And if you're a good viable company then you would need to buy back stock to show you have confidence that your stock price is severely undervalued and you see light at the end of the tunnel
And if you're a good viable company and you're distressed to see the stock market as little more than a casino, you're best off going private and try to raise money another way
the charts only go to beginning of 2009, and i have noticed this display issue before. does everyone see this, or do i need to change a setting?
Technicals provide *context* to price discovery, they are less so much of a *catalyst* in & of themselves.
Traders & investors should use technicals to frame prevailing market prices in relation to historic, and spot points where investors have decided to limit or shift their fundamental valuation points (ie, a breakout indicates a point where something fundamental changed and investors assigned a higher multiple to earnings, or estimates increased, etc)
Mandlebrots (Mis)Behavior of markets has an excellant page showing computer generated charts and real trading charts. Almost impossible to tell the difference until you looked at the next page showing the vibrational frequency used to generate the pattern. An excellant book for those so inclined.
I let the price action on TLB find the trend and when the trend is in trouble. This is a daily TLB of the QQQQ: http://www.charthub.com/images/2009/08/11/QQQQ_Daily.png
The TLBO is the reversal price needed to change the trend. I also use 13, 55, 233ema's on the main chart and Williams %R. But to each his/her own. Find what works for you.
I tend to start with the fundamental story and see if the technicals provide any indication of sentiment one way or the other (this is where they are most valuable, IMO). The reality is, you can't ignore technicals because so many people use them, they tend to become self-fulfilling. If I know what the other guy is looking for as an indicator, why wouldn't I use that to my advantage? Of course, I need a fundamental reason to buy/sell as well, because I don't want to get caught with nothing but my d*ck in my hand.
The problem with TA is the competition. All high frequency / quant trading not based on rebates is 100% TA (programmed by phds and linked directly to the markets). Sure, you can ride the waves generated by these programs... but the HFTs are the house and the odds are against you. Unless, of course, you can consisently match patterns better than phd programmed supercomputers.
What's so goofy is that all of modern finance theory (SD, CV, COV, E(r)) is based on past data which are the SAME EXACT tools of technical analysis. Why would I trust someone who is forcasting a variety of crazy and basically arbitrarily weighted and determined variables to come up with a price more than I should trust a pure price and volume analysis? Fundamental analysts are good for one thing - selling stocks for brokerages with nice stories.
Fundamentals are generally sell-side rationalizations to push stock on unsuspecting buyers.
Technical analysis is basically about probability and outcome. Human behavior exhibits repeating patterns in the marketplace, and through our study of these patterns, we can discern which set-ups have a high probability of a particular result, which improves our trading and investing success.
Many people who embrace technical analysis have a very logical and analytical thought process. This helps one to find and focus on the underlying patterns in price, volume, and momentum in a particular issue or index and act upon the patterns in play.
People like to dismiss technical analysis because of the absence of absolutes. That's not what we're after. We're after moving the odds from 50-50 to 60-40 or 70-30 in our favor. You can get quite wealthy trading or investing with that rate of success.
The chart you show on the QQQQ does not go very far back. There is strong historic resistance/support in the 40 QQQQ area the past several years. The chart shown has a lot of overhead supply in the 41 area based upon the high volume bars when price dropped into that zone back in spring/fall 2008. There is also a rising wedge pattern in the move out of the March 2009 lows, which is a bearish pattern. Of course, the low volume ascent is another clue as to the eventual direction the trend will take. The diffusing momentumm in the weekly candles is another clue a more substantial pullback is in progress.
The market is basically supply and demand. If the fundamentals stink but people still want to buy it, higher prices will result. The contrary also holds true.
That's a pretty basic concept people have a hard time getting their heads around.
I have great respect for Magee and Edwards, but I like Richard Schabacker's Technical analysis. It is not very popular, but it is good stuff.