Very good points, Chris. Since you mentioned there there are places that TA does not work, I will bring up a few points of my own:
1. There are stocks that simply do not lend themselves well for analysis by TA. This type of stock is usually the more illiquid small cap (micro cap) and low priced stocks. And there are simply stocks out there where TA is not accurate enough for trading purposes.
I want to note here that Richard and I are having a disagreement on TA not applying well to low priced stocks. I am going to do a little directed study on this myself soon.
2. There are veterans of TA like Larry Williams that have discovered that for themselves, TA is not enough. TA does not provide enough accuracy for them.
So what is a tehcnician to do when they find themselves in this position? This is after the technician has been able to objectively evaluate and perhaps redefined their strategy with TA and their system.
I find that TA coupled with other tools can provide a significant improvement over just using TA. IMO one of the most powerful tools out there for traders is tape reading. The price action on the chart can mask important events that happened during the day. Also, this is the most accurate way to determine if Accum/Dist is occuring with a stock. Utilizing tape reading to examine the price/volume action of the stock can not only like TA can help you evaluate the probabilities of the stock's direction, but also allow you to track money flow into and out of the stock. It is particularily important to track the "good" money which are the large block trades that have been moving in or moving out of a stock over a period of time.
Another very useful "tool" is evaluating investor sentiment in a stock and market sentiment. There are different ways to do this. For instance, with stock, examine how the stock repsonds to news that comes out on the company and its industry. Examing how the stock behaves with respect to other stocks in its industry and the market. A TA indicator for relative strength in this sense can be used as one indicator of investor sentiment in a stock. Evaluating relative strength goes beyond just looking at an indicator for this. For instance, what does the stock do when the market slides or corrects, before and after the market change? Does it hold its own, or better yet, does it continue its move up. Or does it go down some with the market and as soon as the market stops its slide, it is one of the first stocks to rebound?
Market sentiment can be examined in relationship to other markets. This is where intermarket analysis of TA can be helpful. More specifically, watch what the stock market index like the Dow does in relationship to the bond market. Look at how the market responds to news like the Asian situation, specific economic reports, a hike in the Fed Funds rate, increases in oil prices, or prognosis of earnings disappointments in its leader like the tech sector. Are investors quick to sell of udner hese circumstances, or do they merrily go along their way apparently oblivious to the news. Also, is there evidence of the institutions leaving the market and moving to money markets or even bonds? Is there evidence of investors moving to defensive issues such as utilities, preferred stock, and idustries that are considered "defensive" plays by the investment community? Or has there been renewed interest in the small caps which would indicate improving market sentiment. This can show up both in the short term in looking at specific stocks or the longer term through comparing the Russle index to the Dow for instance.
I also find that extreme degrees of sentiment can be a good contrarian indicator. IMO analyst ratings in terms of the market and a particular stock is also a good contrarian indicator. For instance, if you find a stock that has nothing butmany analysts rating it as a "Strong Buy", that is the time to be thinking about getting out of the stock, or not purchasing the stock. Or if 80% of the analysts are bullish on the market, and you hear reports by some saying that the market is doing very well and cannot be better, this is a very bad inication of things to come for the market. This is what happened earlier this year before the second market correction. This was the tipoff to start looking for the possability of a amrket correction. Finally, how you use market and investor sentiment in a particular stock depends on your timeframe.
I find that sentiment plays a very imprtant role in determining where the market will go next. Tape reading is very helpful in figurring out where the money is moving from and moving to in terms of industries and sectors, and also can help traders and investors know when to get out of the market before a correction occurs. On a related note, it appears that the stocks which did not have good relative strength in the market are the first ones to slide before the market and its leaders do. Also, tape reading can help allot in timing ones entry and exit as a trader. This is particularily helpful for very short term trading like day trading.
I also think it is important to understand tacking investor sentiment or utilizing tape reading does nothave to be complex, but it will be a process of investigation to determine what works for you. Also, tape reading itself takes time to learn, but IMO it is very worthwhile effort.
Just some of my thoughts and ideas.
Bob Graham |
