1976 is the year that I began my study of technical analysis at The Stock Market Institute. The course was based upon the principles of Richard Wyckoff a student of the stock market, a great trader and a pioneer of technical analysis. Based on his theories, studies and real life experiences, Wyckoff developed a trading technique that has withstood the test of time. I have relied on those techniques for close to 40 years and the time has come to expand my horizons.
I will be taking you along with me as I explore both old and new methods for gauging the actions of the stock market.
The use of computers and charting services like Worden’s TC 2000 or Stockchart.com have made it easier to identify good investment opportunities, of which there are many. Who would have thought that there would be more mutual funds than stocks traded on the New York Stock Exchange? And now with exchange-traded funds (ETFs) investment choices just keep multiplying. Additionally, one does not have to be locked into just domestic funds, there are foreign funds as well. With all of these options available where does one start?
Most people can’t live without their computers, but few use them them to find investment opportunities. The PC allows an investor to monitor his portfolio and to perform scans for investment opportunities, which is the subject of another post.
The starting point for analyzing any opportunity is determining if the investment is going up or going down. You certainly don’t want to invest your hard earned money in an investment that is going down in value. You can use fundamental analysis, researching earnings reports and expectations of future results or you can use technical analysis. Just the word “technical analysis” scares people. They don’t realize that it is a visual tool and many people are very visual learners. Using technical analysis is a much quicker way of assessing the value of an investment opportunity.
Stocks go up because the fundamentals are good and stocks go down because the fundamentals are bad. By looking at a chart you can see if a stock is going up, going down or neutral (in a trading range). By looking at a chart of the market or an individual stock you are in fact looking at the fundamentals.
Price action is really very simple to understand, it is driven by supply and demand. If there is more demand for a stock than supply the stock will advance and if the supply is greater than demand the opposite holds true. The principles of charting can be used on any type of investment with little or no knowledge of the fundamentals.
When you are looking at a chart it is a lot like driving a car. You need to open your eyes to know where you are going, the same applies to your investments. You need to look at your potential investment to see how it’s doing before you invest.
Before you buy a stock you need to know the trend of the market, the trend is your friend and you must keep that in mind. The chart above shows market cycles and knowing the trend will help you identify where in the cycle you are. Currently I would suggest that we are in that area called “euphoria and greed”. The markets are still trending upwards but approaching their ultimate price objective. It is a time to think about protecting your investments, perhaps taking a few profits. It is not a time to be aggressive.
So, what are trends and how are they drawn?
I’m going to use a two year chart of Apple Computer:
The trend can be up, down, or sideways. A downtrend is defined by a series of lower highs and lower lows while an uptrend is defined as a series of higher highs and higher lows. As long as this continues the trend will remain intact. Any failure to reach new highs or new lows is a sign that the trend is changing. I would suggest that the best entry point is after a stock has moved out of a trading range.
Trend channels are made by drawing a parallel line from a high point between two low points at the beginning of a move. In this case there are two tend channels since the move to the upside accelerated.
You can see the usefulness of trend channels in the image below. What is quite apparent is that the markets are in need of a correction, and soon.
One final look at trend lines with a look at the ups and downs of the S & P 500.
Trend lines are useful in that they paint a picture worth paying attention to……