I was having a conversation with someone recently who told me that they do not think technical analysis is useful because it is right until it is wrong. I said you have summed it up perfectly. Your conclusion is where you are off base. Analysis, regardless of the type, is in fact right until it is wrong. Our lack of discipline is what prevents us from acting when the evidence tells us that our thesis is in need of adjusting.
“When the facts change, I change my mind. What do you do sir?” John Maynard Keynes said this in response to a questioner who pointed out that Keynes had been wrong about an economic prediction made some time earlier. Sounds like a logical thing to do. Certainly, it is not a complicated thing to do. When the facts change we should change our thinking. But, our biases, fears, ego etc. get in the way far too often. Hey, if you think the economy is headed for a double dip but the Leading Economic Indicators continue to improve, be an adult, adapt to the changing facts and act accordingly. Always move toward strength.
If I had a nickel for every time I have heard someone say, "I know the stock is down, but _______", I would be a rich man. The blank could be filled in with: they have a good management team, the P/E is low, they have a good new product coming, etc.etc. Hey, the stock is getting smashed, you are wrong. Have the confidence in your ability to move on and find a better opportunity. That is why I like the technical side of things. It is black and white. We buy and sell price ultimately. When price goes up, good; when price goes down, bad. I have never had a trader tell me hey the stock is trading at $35 but I’ll buy it from you at $40 because they really do have a good management team. So, couple the supply and demand picture with your fundamental analysis. When your fundamental analysis says full steam ahead and the stock sells off, you are wrong. When the charts are strong in a name you feel has great fundamentals, discipline again is your guide. You can’t be afraid to make money. When the fundamentals and technical picture are both positive, let your winners run.
Last week I summed up my technical work as succinctly as possible as follows:
If we see closes above the following levels then we’ll see an assault on recent highs; S&P 1323, Dow 12,180, NASDAQ 2795. If the following levels on the major indexes are breached to the downside, selling will accelerate; 1294/11,980/2705. There is my technical take. If the market goes up, take all the news that is out there and give it a positive spin. If the market goes down through support, take all the information that is out there and give it a negative slant and you’ll have your why.
Just another way of saying you’re a bull if this happens and a bear if this happens. You are right until you are wrong. Let someone else write a 10,000 word screed on the debasement of this and longing for a bygone that. Are there a few core fundamental reasons to own this thing? Can we track how these factors are developing? Is the chart strong? Let’s do it! When the chart bends in the wrong direction the people on the opposite side of the trade were right and it is time to move on.
The S&P 500 finished the week up 1.27 points or 0.10%. A lot of intra week volatility for very little profit. A few weeks back the S&P closed above the 4 week exponential moving average for the 12th straight week. This matched the longest streak since the market bottomed in March of 2009. Two weeks ago the streak was broken. The market has consolidated this long run and the Index closed back slightly above the 4 week moving average on Friday. Last week was an inside week, the high and low for the week was contained within the high and low of the prior week. This sort of action implies consolidation. The high and low for last week on the S&P (1332 and 1302) should be watched this week.
The recent market volatility is a sign of rotation in the market. Many of last year’s huge winners are being sold off. The healthcare sector has improved significantly in recent weeks. Investors are rotating to that sector of the market. Support for the S&P is 1293, a key level for the Dow is 11,940 and NASDAQ support comes in at 2842.
Last Tuesday the market sold off sharply. The S&P 500 was down more that 1.5%. Oil prices pushed thorough $100, ADP Employment Change for February was surprisingly strong and Bernanke gives no new insight on economy and its outlook, but offers positive viewpoint. Those were the headlines at the end of the trading day. How on earth am I or you supposed to do anything with that? The market was down huge on a day like this! The real reason the market went down that particular day, more sellers than buyers. Two days later all that same information was out there and the market soared higher. Similar headlines were typed up. The real reason the market went up that particular day, there were more buyers than sellers. But, the people that write updates for Yahoo Finance and the AP would be out of a job if they didn’t come up with a reason.
There are a lot of people in the world that want to improve their diets. They want to eat more meat and poultry. Regardless of how much we talk about alternatives, demand for oil is still a huge global economic factor. Technology is advancing on a daily basis. People want to connect with others faster, with more information than they did yesterday. They will want more speed and service tomorrow. People still have concerns over the health care needs of their families.
Companies that plant and till, explore and drill, make cutting edge communication and storage devices, and provide superior health care options will thrive. Which ones? Look at some charts. The ones that are the best see more buyers than their competitors.
