The Secret World of Chartists

It’s a strange world filled with buzzwords and jargon – aroons, impulse waves, ascending and descending continuation triangles and the vaguely scatological double bottom. I like charts. I use them and have learned the arcane argot of those who look for a continuation wedge in the chart of a company on the watch list.

Now, is all of this necessary? No, if you can find a chartist, aka technical analyst, upon whom you can rely – and that’s not easy.

Technical analysts don’t look at the larger economic picture and the claim a company will stake within that economy. Instead, these chart gnomes look for signals of bullish or bearish trend reversals based on the appearance of a “flag pattern” on an index chart. Many of my compatriots in technical analysis eschew fundamentals as nothing more than a distraction, or worse, an indicator.

If you’re making your buy and sell decisions based on chart metrics alone you’re deliberately ignoring valuable information about a buy or sell. How about looking at insider activity?

I want in on a company run by a CEO who just bought another $2 million of his own company. Now that’s a CEO with confidence and a man or woman with the most inner of insider knowledge. The guy runs the place! So, I place a lot of credence in fundamentals – insider trading, a turnover in management, product development – the whole nine yards. And the web has made researching companies as easy as click, click, click.

What Do Charts Really Tell You?
Charts do provide a visual means of correlating a great deal of data. A detailed chart shows patterns, identifies extent of market interest and does, indeed, provide buy and sell signals based on patterns. It’s true – and the research backs me up – that certain patterns of share price activity often indicate a buy or sell opportunity – some patterns more than others.

For example, the double bottom configuration, which looks like a big “W” on a chart. Fledgling chart analysts often assume that a double bottom is a bullish indicator because that’s what technical analytical lore has taught them. However, that’s not the case. That chartist is flying blind.

First, double bottoms (the W configuration) are very common and appear within long-term charts for almost any company. More importantly, there are no absolutes in selecting a buy or sell with or without chart analysis.

Research indicates that double bottoms fail to perform as expected 64% of the time, yet those reading “Technical Analysis for Morons” will act on a double bottom – and lose big time. The fact is, even expert chartists don’t agree on what a double bottom is! Some believe that there must be a 15% increase in share price before the initial sell off and a 20% climb after share price bottoms out.

The problem is not in the charts, which are as neutral as humanly possible. The problem is almost always in misinterpreting chart data based on faulty logic, emotion or lack of experience. Chart reading and analysis is far from an exact science. As I said, even the practitioners of this form of stock analysis don’t agree on bearish and/or bullish signals. I can point you to 10 technical analysts who will tell you a double bottom is a buy sign and 10 who say “by all means sell!”

So What Does This Mean to the New Technical Analyst – the Confident Trader?
Simple.

Charts are just one tool in your kit – just one more source of information. I use them for a variety of purposes including:

• confirming or contesting company fundamentals

• identifying stocks to add to my ever-changing watch list (sometimes I track a stock for 24 months before taking a position)

• modeling a test portfolio and tracking its progress

• identifying share price patterns that I then support with company and fundamental research

• performance comparisons – load two, three or five companies onto a single chart and comparison shopping and culling losers becomes simpler and less time consuming

• providing guidance in buying and selling decisions

• identifying false bottoms and other signals that preclude my taking a position at that time

• yucks and grins – I love chart analysis.

Chart analytics isn’t difficult, though some within the tech analysis sphere continue to protect the arcane persona of charting. Believe me, there’s nothing difficult about gleaning information from a well-developed chart, customized to your buying and selling preferences. So, in the coming weeks I’m going to delve a bit more into the mysterious world of chart analysis – bearish and bullish signs that may indicate a buy or sell.

However, and I can’t say this enough: charts are one tool. To me it’s the best, most neutral tool for the development of information, but I also recognize that chart data is often mis-analyzed, even by the best of them, so relying on these impartial metrics only gets you so far.

Read. Investing and growing wealth shouldn’t be a hobby or something you think about once every three months when the statement arrives. Learn to use all of the tools available to you – including the right way to employ chart numbers, configurations and assumptions.

All the best,
Tim Schewe, CEO
ConfidentTrader.com