Technical Analysis

Technical Analysis

Technical Analysis was my introduction to the financial markets. I stayed in that space for about 15 years. I read everything I could about it and how it pertained to the Stock Market, The Futures market and later on even the Currency market. I learned a lot and after that I unlearned some of what I thought was true. What each individual investor will take away from Technical Analysis will differ from person to person. What I’m going to talk about here is what I have taken away from it. It is not meant to be the last word on the subject. It is just another tool for the investor to use.

Technical Analysis comes into its own when you apply it to the breadth of the market. I take the cumulative advance decline line of the NYSE (common stock data only) and apply moving averages to it and then subtract the longer of these averages from the shorter ones to come up with something called a “trend deviation” indicator, just a term for a form of momentum. This was all covered in my post on April 9^th, ‘The Hidden Message in the Stock Market’. So instead of using TA to look at individual stocks I look at it to gain insight about the nature of the whole underlying market. And I don’t try to predict the future with it. My goal is to use the information to manage my risk. This approach I’m using with TA is still a work in progress.  

Technical Analysis does have applications to the movements of individual stocks but I keep it simple. I use it as support information after I have looked into the fundamentals of a company. I like to use weekly charts to smooth out the noise of the stock’s movements. A long term moving average is useful (I use 144 days or 30 weeks) in that when a stock gets too far above its ma it has a tendency to regress to the mean and correct back, the reverse is true on the downside. This can help you time your entry in and out of a stock. It helps give you the big picture in stage analysis in that a stock will base, then go up, then top out and eventually go down. This is a very simplified version of stage analysis. You might want to check out the book, ‘Secrets for Profiting in Bull and Bear Markets’ by Stan Weinstein for more on this. A great book on TA is ‘The nature of Risk’ by Justin Mamis. It won’t be to all tastes but I loved it. He takes a more psychological approach to TA. Relative strength is a powerful TA concept. If the overall market sells off while a stock stubbornly goes sideways it’s telling you something about the underlying fundamentals of the company.

That’s about it I guess. For me TA provides supporting information after I have looked into the state of the current market environment and the individual stock. A word to the wise, don’t get caught up in the use of a lot of indicators. You might stay in that space for a long time with little to show for it. Remember the concept of information overload.