To be up-front, let me just say that trading from the charts provides no guarantees. The spectrum of opinions on it is wide, ranging from some who call technical analysis hocus-pocus to others who swear by the accuracy of their obscure indicators. Of course, there’s everything in between too.
For me, the charts are more than just an engagement tool, although I don’t ignore all else. Earnings, for example, are events which are fundamental and ground-moving, plus they’re scheduled, so since they often produce sizeable gaps I always try to avoid them. But the price action is what I base my decisions on, because I believe there’s a lot reflected in the price action.
On the charts, we get a reflection of where supply (highs) and demand (lows) are, as well as just how broad the participation is (volume). It’s a picture of group psychology, it’s the picture of how attitudes have played out. Even better, it’s real-time so everyone gets the same information simultaneously, which is more of a level playing field than something like analyst actions (upgrades/downgrades) which some folks are privy to ahead of time.
Trading from the charts is not perfect though. That’s of course why I place such an emphasis on losing the right way, knowing that I’ll at times be dead wrong no matter what I thought the chart looked like. But aside from being right or wrong, there’s also the element of surprise.
Sometimes we see a left-field move, out of the blue, fill-in-your-cliché. A move which flies in the face of the story which the price action had been telling. And you know what? Nothing can be done about it, so when you’re caught by surprise and it’s off and running while you’re flat-footed, just let it go.
On Tuesday, one of those moves came in $SUNE. From a price-action standpoint, the case for a failing bounce was certainly credible:
- Lower highs have been in place since March 6th with every bounce being met with supply at lower levels.
- Several descending trend lines were temporarily broken in recent months, only to fail just days later.
- Last week’s falling wedge breakout was lackluster and upside volume was diminishing.
- Price finished off its session high in each of the previous 5 sessions despite advancing.
The case for a heavy-volume spike higher was certainly not one I would have made. I had no position in the stock, but when I ran across it last night in my research I just had to make a few points.
Take what you can from the charts, rely on them like I do if you will, but understand as I do that they don’t foretell anything. They show us what has been happening, and what we do with that is called trading. No legal approach to trading is perfect – even HFT’s have a down day every year or two!
The charts don’t provide the perfect plan, and there will be missed moves which didn’t appear imminent. Surprising moves, gravity-defying moves.
I’m still a chartist though. Studying the price action can still give us an indication of the rhythm of the moves, it can still allow us to be decisive in our actions, and through it we can still often determine the path of least resistance. After that, it’s all about good management anyway.
Trade Like a Bandit!
Jeff White
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