Financial writing does not have to be staid, flat, or dull; it can be colorful, and it often is.
- Last week’s new highs have been greeted with nothing short of a smack-down as talk of the “death cross” in the Russell 2000 and a potential “Alibaba top” have dominated the discussion on trading desks.
I guess the same could be said for market technician terminology, as it relates to charting. “Death Cross, although figuratively suggestive, is straightforward, but it took me a minute or two to figure out the “Alibaba top” and not only is it suggestive of the mania for the recent IPO, it sounds cool. Here are a few more cool ones …
- Diamond Top, Exhaustion Bar, Island Top, Island Bottom, Cup and Handle, Pennant Bullish, and, of course, Head and Shoulders.
Yesterday, I wrote about the “Bearish Wedge” chart pattern that suggests the market might see a 1000 point drop in the near term. As I said, using charting as your sole means of trying to ascertain near-term market movement is a mistake, as its predictions rely on traders to execute the prediction because it is a prediction. Simply, it has to be a self-fulfilling prophecy to come true. When traders see the pattern, they act and if enough of them act according to the pattern, it becomes true.
Understand, because of the self-fulfilling aspect, charting is no less relevant than technical analysis or fundamental analysis. All three rely on data to arrive at their guess and, with the market, all three are a guess.
The market is unpredictable specifically, but not so generally, much like the weather. Meteorologists can accurately predict it will rain in California, but accurately predicting rain for a town hidden in the shadow of a California mountain is a bit more difficult.
The fact is the market acts emotionally a bit too often, making it irrational when it does. But, in my belief system, the market always comes home to an objective reality – earnings and fundamentals. As long as those two things are good, and no calamity is driving panic in the market, the market will not fall part and it will probably go up. As it is with charting and technical analysis, though, good fundamentals or earnings are debatable, which makes all three analytical approaches an art, not a science.
- While there are general ideas and components to every chart pattern, there is no chart pattern that will tell you with 100% certainty where a security is headed. This creates some leeway and debate as to what a good pattern looks like, and is a major reason why charting is often seen as more of an art than a science.
The trick is to understand all three approaches are predictive to mass-market movement, i.e., finding a trend and that is a good thing.
- There are two types of patterns within this area of technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a trend will continue once the pattern is complete.
So, if you can recognize and interpret a pattern, than you can make your guess – a trend will go one way or the other. Pretty simple. The trick is recognizing and interpreting.
All market watchers can do is collect our respective data and make our best guess about the future of the market. For example we have been in a bullish trend for over five years now, and even though the market is currently going up and down with volatility, I, and many other fundamentalists, see no reason that trend will change in the near term. The US economic fundamentals are good and getting better slowly over time. We have not reached the top of the economic cycle.
The chartists and technical analysts are suggesting other possibilities, such as a 1000 point drop based on the Bearish Wedge or a correction based on breaking through the floor of the S&P 500 at the 1980 or 1955 level, depending on which long-term average one uses.
Me? I have said what I believe and the statement below expresses my belief quite well.
- This market continues to be a tale of two tapes with the blue chip indices appearing to be in a consolidation phase while the small and midcap indexes are trending lower. In short, this is the very definition of a neutral market environment.
Yes, indeed, if today’s market movement is any indication, the technical bulls are not willing to let the market crash through the S&P floor and the Bearish Wedge just took another shift away from its pattern. The fundamentals, however, have remained the same – good and getting better.
- According to the Commerce Department, New Home Sales in August surged 18% last month. The annualized rate of sales was reported at 504K.
- The reading was well above the consensus for 430K, above last month’s revised level of 427K (from 412K), and August’s growth was fastest pace in six years.
- On a year-over-year basis, new-home sales were up 33%.
Ride out the volatility. It will settle down.
Trade in the day; invest in your life …