Gary: At this moment, I do not know your investment style and assume that you are a long-term fundamental investor who buy stocks with good earning potentials and hold them for the long pull. If this is the case, then technical analysis is of less value to you. Who cares about the short-term peaks and valleys if the big picture is sound? Still, some fundamental investors have used charts successfully as warning signals or safety valves at critical junctures. For examples:
1. If a stock has developed a head-and-shoulder formation and the neck-line is just broken, a red flag will be raised warning the fundamental investors that something is not right despite bullish reports, impressive press releases and bright big picture painted by mouth-foaming analysts. At this juncture, the investor should sell even though the fundamentals are sound. Don't argue with the tape.
2. If a stock has bad fundamentals and has been reporting declining earnings for many quarters, then one day when it announces some terrible news such as record deficits, it fails to go down further and instead creeps up in heavy volume, breaking a declining tops formation. At this junction, the investor may consider jumping in despite scary reports from the analysts. Again, don't fight with the tape.
But if you are a short-term trader, tea leaf reading is a must to be successful. You are not going to catch every single turns, but you will have a BIG edge over long-term investors because you understand price and volume ALWAYS precede fundamentals. By the time you have already taken profis, the fundamentalists just wake up in awe for not knowing what hit them. A recent example is my "very near term 10-point gainer". This stock jumped 9.75 points in two days AHEAD of the article in the coming Fortune magazine. How could I identify this rocket BEFORE it launches? The answer is : tea leaf reading (screening), tea leaf chewing (analyzing) and tea leaf digesting (understanding).
The two books that you suggested seem to be good starting points. After you have finished reading them, then you can ask me more in-depth questions in technical analysis. I like to let you know that technical stuff is not cake walk, and it will take time to learn (I spent about 12 years at the Pacific Stock Exchange drinking tea). But don't get discouraged. Learn as time permits.
Metastock and other softwares are good tools. I used Metastock about 10 years ago and found it satisfactory. However, even though I love computer and high techs (I am a technical specialist and know computer intimately), I prefer the old-fashioned way: charting by hands. I'll let you know the reasonings when I have time.
Lastly, chart reading is an ART, and not a science. So, proceed with care and prudence.
Best wishes from a mad monk. |
