Stock market chartists (technical analysts) claim they can predict the future by studying past share, index or commodity price action. They can draw lines that ‘prove’ specific levels are ‘support’ and others are ‘resistance.’
The problem is that it doesn’t work most of the time. Even a broken clock is correct twice a day. Technical analysts constantly trot out their ‘broken clock’ winners to suck you in to the idea that you can profit without understanding what you are investing on a fundamental basis.
What does a TA practitioner do when a presumed support level is violated? They note the next support price that they have identified from past trading. If the new, lower price holds, they can declare victory. If not, it’s on to yet another cheaper target.
Does price action indicate that the ‘smart money’ knows how a quarterly report will look, or how the market will react to it? Take a look at just a few days of trading from last week in the shares of infrastructure play Aegion (NASDAQ:AEGN).
The company was due to report after the close on Wednesday April 24th. By mid-morning on Monday the stock was down 3.2% from the previous Friday’s close. Did that mean ‘get out’ because somebody knew the news was going to be bad? By 11:00 am on Wednesday the shares were up to $21.63, 5.8% higher than the previous week’s close. Did that make them a buy because insiders were sure the quarterly report would be great?
Oops. A mini flash-crash in AEGN sent the stock reeling to a weekly low of $19.72 in just seconds. Trend reversals like that shouldn’t be ignored! But wait, right after the open on Thursday, AEGN popped to $22.47.
From Wednesday’s low to Thursday’s high the shares had moved 13.95%. The only thing those widely varied quotes told you for sure was where you could buy or sell. From 4:00 pm on April 19 to 4:00 pm on April 26 the stock moved from $20.44 - $21.07. The enormous gyrations were simply noise that needed to be ignored unless you wanted to sell high or buy low. Doing that is the antithesis of technical analysis.
I challenge all readers to show me any published technical analysis that could have helped traders make money in the Russell 2000 over the past two months. Following trends would have caused severe whiplash accompanied by extreme money hemorrhaging.
Do your accounts a favor. Stop reading about technical trading. Do homework on fundamentals then buy when prices are low. Your future net worth will thank you for making the effort.
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