Technical analysis and trading
We go on green and stop on red
Posted Jun 24, 2005
From the feedback and comments
I receive everyday from readers and subscribers, I have come
to realize that most traders do not have the ability to differentiate
between TA (technical analysis) and a trading signal. The unfortunate
result is a poor return on their investments, and worse yet,
a gradual loss of confidence in themselves, and eventually questioning
if the whole TA thing is nothing more than voodoo.
Trade what we see, not what
Just another cliché? Absolutely not.
The thinking (technical analysis)
The thinking part belongs to
TA. By using what we know, we try to lay out a road map for the
markets, to know where we are coming from, and where we are going.
There are many methods and approaches to TA, and each has its
own limitations. Elliott waves, Gann, The Delta phenomenon, cycle
analysis, time and price retracement, the Bradley model, on and
on...welcome to the supermarket of technical analysis! Without
insulting to any of these folks, I always insist that TA is nothing
more than an educated guess. Sometimes the markets are very accommodating,
and sometimes they are not.
Here is a simple example of
TA in real time.
The $HUI rallied to resistance
on Friday, and what I expect is a pullback to form a "handle"
in what technicians call a "cup with handle" pattern.
Upon a breakout of this pattern, price will head to the next
resistance, which is at around the 230 level, where it may form
another cup with handle. This common pattern occurs in all time
frames, specifically in a bull market when a sell off is met
with enthusiastic buyers to bring prices back where the sell
off began, and upon a little struggle between the bulls and bears,
the bulls win and we have a breakout, then onwards to the next
This is the $HUI's hourly chart,
again, in real time.
The sharp pullback from the 195 level was met with strong buying
at the 183 level, resulting in an intraday cup with handle, and
a subsequent breakout, with a price target of 207.
This is the $GDM from a long
The five year sell off began
in 1996 and ended in 2001, and it only took three years for buyers
to push the index back up to resistance, the level where the
sell off began. And since meeting resistance in Dec 2003, the
market has been building a handle, creating whipsaws for both
bulls and bears. This struggle between bulls and bears will continue,
until the bulls win. (according to the pattern) And what a breakout
it will be!
So, with this fantastic piece
of TA, when and where do we buy? Will the market accommodate
us by doing exactly, according to my clever little lines and
patterns? This is where trading signals take over. TA is the
road map, and trading signals are the traffic lights. Once we
know where we are going, we must obey the traffic lights so that
we will reach our destination in one piece. Going thru red lights
or stalling at green lights may not get us killed, but it will
disrupt our journey, and personally, I've been there and done
that, many times. Now I am an advocate for road safety and safe
driving. Let's check out the traffic lights...
The seeing (trading signals)
I have five trading signals
from my trading model.
BSBS, BRSS, TLBBS, TLBSS, TLB. (anyone wishing a complete list
of signals and acronyms I use can download from my website, address
I let these signals guide us in and out of the markets. Like
traffic lights, we go on green, and stop on red.
Again, in real time, we had
a TLBBS (buy signal) on 5/24. This was the first buy signal from
the sell off which began in March, with the presumption that
it was just a tradable bounce.
Then on Friday 6/10, the hourly
chart gave another buy signal (BSBS), and alert was sent out
Now, with this week over, we
have a confirmation of a weekly BSBS, which is a major buy signal.
This third buy signal means that we have a buy signal in all
three time frames, the first time it ever happened since the
bull market began. Anyone who is not 100% invested by now and
wishes to buy or add should do so on weakness and pullbacks,
as I do not expect another signal anytime soon.
The markets are dynamic and
subject to constant change, an axiom I preach and practise. My
TA has turned me bullish, as the outlook is very promising indeed.
But I did not buy because I was bullish, I bought because
I had buy signals. In fact, I was bearish when the first
buy signal occurred, expecting nothing more than a tradable bounce.
I was still somewhat hesitant at the second buy signal,
not expecting a whole lot. Then this week, the cycle reversed
up, the weekly BSBS is confirmed, COT model has just bottomed,
the yield spread has begun to widen again... enough bullishness
to yell "to da moon." But I won't. Respect and obey
the traffic lights, and we'll reach our destination.
Speaking from my own experience in this journey of financial
investing, it is always the "thinking" which gets me
into trouble, and the "seeing" which gets me out.
Trade what we see, not what we think.
Markets need not be predicted, or forecasted; just followed.
Peace and profits,
Jun 18, 2005