The stock market is an extremely complex mechanism, and no single method will ever be the magic potion that some people are constantly looking for. Different styles make money in different environments and that will always be the case. I wanted to point out a case where at least in the short term, technical analysis failed miserably. The chart showed an awesome breakout on huge volume, only to sell off below the earlier point on bigger volume.
Take a look at the chart of China MediaExpress Holdings (CCME). You could not ask for a better breakout towards the end of the chart over the two previous resistance levels and it happened on enormous volume as well. It is about as textbook a breakout and thus bullish sign as they come, but clearly the next two moves did not happen favorably for the bulls. The next day the entire move was reversed and then an even bigger decline happened and volume escalated each day. Why did this happen?
Friday’s rout coincided with a terrible market that saw small caps get demolished. It was the first day of real selling in a few months for the market and not much was spared. Monday’s action was the result of a negative article by a firm called Citron Research, which basically said the company is a fraud and “too good to be true.” That’s a pretty big allegation and investors shot first and asked questions later. A lot of these Chinese small caps have been accused of being frauds, so this is almost par for the course and explains many of their huge discounts to comparable American firms.
Is Technical Analysis Worthless?
I think technical analysis has its place and is valuable to those who use it correctly. As shown in this article, it is not infallible, and even clear “buy” signals can fall flat on their faces if certain news events or the general market do not cooperate. I would use technical analysis as another weapon in your arsenal and as a confirmation to the fundamental analysis you use to do your due diligence. It can be a powerful tool if it confirms your bullish fundamental thesis. I don’t believe in only using technical analysis to trade but many do, so it is worth knowing just for that reason.
As an aside, I think the sell-off in CCME’s shares presents a good opportunity to buy the stock. It is one of the more visible Chinese small caps and although possible, it is unlikely that the company is a total fraud. Just a few days ago, the stock rocketed because of short squeeze fears and now we are some 25% below that level. I would buy a few shares here if you could.
Technical Analysis Is Not a Silver Bullet is an article from: 
