Lee, first off, let me strongly stress, that TA is a tool with very clear limitations, and must be used in conjunction with other analytical methods. By itself it is worthless at best and misleading at worst. In conjunction with other tools, it can indeed be very useful (TA is like an x-ray machine, by itself the picture is worth nothing, in conjunction with other diagnostic tools, and with the interpretive knowledge of a physician, it can be a very useful thing). Further, I'd like to decline the lofty title of “great Analyzer of all things technical”, which you have so kindly bestowed on me – I do my analysis based on a variety of tools, and I certainly don't aspire to TA orthodoxy (I think too much of classical TA is bunk). As an example, the famous DMA analysis which is the bedrock of so much TA touted all over the place is very misleading IMO. I've written about this before, and Herschel Rubin pointed out the folly of relying on the DMA lines for your trading/investing decisions. The disastrous results can be seen for example right here in NITE as recently demonstrated by Mr. Raymond Norris' reliance on the DMA, from a post on July 11 on this board:
<<The 20 Day moving Average, the best predictor of short term movements, is still below the stock price. In other words, the stock probably will find support at that average (around $55) and bounce off it to move up.>>
Boy, was that “best predictor of short term movements” ever wrong! The plain truth is that it is NOT a best predictor, not by a long shot. The stock certainly did not find support at 55, and did not move up from there. Instead, it visited the low 46.
And to follow such senseless advice can be catastrophic – from the same post by Norris, in response to Dennis Patterson...
Dennis Patterson: “Could explain things of late. I sold 4 days ago for a small loss. It looked like it wanted to go higher, but someone was selling into the strength”
In response, Norris says: “I disagree. I think this is a trap before NITE breaks through $64.”
He goes on to give a variety of reasons why this is supposedly so – all of them idiotic, prominently among those reasons, is the 20 DMA quote above.
The danger of following such advice as Mr. Norris' and his home-made charts provide, is that you are liable to lose tremendous amounts of money in the market. Dennis P sold for a small loss on July 5 for a small loss, while Norris would have you betting heavily on a breakthrough from 64. Well, if you bought at 64, you'd be sitting on a 25% loss right now. The “longer term” perspective may be that one day NITE will go above 64, but apart from the opportunity cost of sitting and waiting for the stock to return, Dennis P was absolutely right to sell, because after all even if NITE goes back above the 64 mark, he could buy it now for under 50, and ride it to 64 and beyond, thus more than making up for the “small” loss. That is why, as a trader, you must cut your losses immediately. And if you are a long term investor, then you don't need Mr. Norris' home-made TA anyway. So either way, the senseless chatter about the 20 DMA as interpreted by Mr. Norris, is worthless at best, and misleading at worst.
Is the use of DMA therefore completely without merit? Of course not – just as with TA in general, DMA must be used in the appropriate context, and in appropriate circumstances. Think of it this way: Mr. Norris, observed a doctor administer mouth to mouth resuscitation. One day, he was driving down the street when his car died. Remembering that mouth to mouth resuscitation is a valuable life-saving tool, he hops out and administers mouth to tail-pipe resuscitation to his Ford Pinto. Well, we can leave Mr. Norris with his lips glued around the tailpipe, but the point is this: there is nothing wrong with mouth to mouth, and it *is* a valuable tool, but it must be used in the correct circumstances, and you must recognize when it is not appropriate to apply it. Otherwise you are liable to actually reach the opposite conclusion from the correct one. In fact by a coincidence, at the same time that Mr. Norris made his proclamation that the decline “was a trap before NITE breaks through $64” I had written a post based on my trading experiences at ground zero that day, wherein I said exactly the opposite, and I posted a day earlier than Mr. Norris (July 10), “KM - I personally did not bail out *only* based on the action of Friday. I bailed because the stock was acting very poorly for some time - and Friday was just the last straw. The thing is, I should have listened to the TA a long time ago, instead of wasting weeks with my capital tied up.”
The point I'm making here, is not that I don't make mistakes, but rather that I too make mistakes – I made a mistake of waiting to bail just before 60, instead of bailing out at 64. And I proclaimed my mistake many times (I wish Mr. Norris would have the simple decency to acknowledge his error in cheering a breakout beyond 64, while subsequently NITE declined to visit 46). But the interesting point here, is that my mistake was NOT FOLLOWING WHAT MY TA TOLD ME. My TA and other tools was indicating trouble as early as June 30 when I wrote a post on this board: “Now, maybe this is all innocent, but I've been watching NITE on the LII for a long time (I trade it every day) - and I'm telling you, this behavior is very strange.” "Moreover, I've seen buying pressure met with consistent selling, in huge amounts.” The point is, that I was looking at the same charts and data that Norris was, and I was reaching the opposite conclusions. My mistake was not following my TA – while, Mr. Norris was looking at the same TA and reaching the opposite conclusion, that we are headed for a breakout above $64. He saw the decline as a trap on the way UP, and I, from watching the trading reached the opposite conclusion – when the price went up briefly, I smelled a trap on the way DOWN “Meanwhile the last 1/2 hour of trading was amazing, and grew ever more incredible the closer it got to the close. Big blocks were selling regularly, but the price was being walked up systematically. Man, it smelled like a trap.”
So, the question is, how can two people be looking at the same TA, and reaching opposite conclusions?
It is because it is critical to se the data you get from TA in the proper context. For me, the trading action is “the best predictor of short-term movements”, not the 20 DMA taken in isolation as Mr. Norris did. I use the 20 DMA *where appropriate*, but not in the mouth to tailpipe resuscitation mode. Mr. Norris is contemptuous of intraday price quotes (he called it amateurish), and following orthodox TA, only pays attention to the closing price. Here perhaps the illustration of the pitfalls of his kind of TA is particularly stark, which is why I'm examining it in detail. Orthodox TA indicated for both me, and him, that the stock had turned around (from the same post I wrote about the trap: “Man, it smelled like a trap.
Whatever. The point is, NITE satisfied the barest minimum of my TA requirement - close positive. But boy, was this grudging! It could not have been a more mean, hard little thing: volume low (better: high), positive close but about as small as it was possible (better: close to, or better yet, above the day's high).”
So, here you see where our analysis diverged. Yes, based on the closing price, and chart, and other TA indicators, the stock looked poised for a recovery. But, *directly contradicting* orthodox TA as espoused by Mr. Norris, I DID pay attention to the intraday trading activity, and I looked at the *QUALITY* of that closing quote. And that quality was very bad indeed. The EOD trading action, in fact seemed to me to be designed to deceive the followers of orthodox TA, such as Mr. Norris. The MMs know that many ignorant practitioners of TA, follow indicators blindly (such as DMA, closing price etc.) – so you often see ‘painting of the tape' to conform to the TA dictate (such as the closing price on that day). If, like Mr. Norris, you only follow the chart action and ignore the trading quality, you will necessarily have incomplete data, and indeed *purposefully misleading data* (done for the benefit of the likes of Mr. Norris. That is why, on that day, the EOD action looked to me FAKE, and I called it a trap (to conform to the TA for the ignorant): “Meanwhile the last 1/2 hour of trading was amazing, and grew ever more incredible the closer it got to the close. Big blocks were selling regularly, but the price was being walked up systematically. Man, it smelled like a trap.” That is what Mr. Norris missed – and the price crashed disastrously. But, it was there to be seen – the price was *artificially* walked up. The whole action was highly irregular, and it smelled like a trap.
What is the purpose of this whole focus on TA and the example of Mr. Norris? It is to illustrate very clearly, why I do not trust disconnected TA, and TA without a context. The pennant formation you described has to be seen in its proper light. Not that there is anything wrong with the tool itself. I just do not believe that it is relevant at this moment. There are other factors which are far more determinative than the formation.
In my view, we reached a *temporary* bottom, and are now rather constrained in any upward movement. Why temporary bottom, and not “permanent”? Because we broke an important support line at 48 1/2. This means that under any kind of pressure (like a very negative market), the temporary line of 46 intraday is not going to hold – because under milder general market pressure, 48 1/2 broke. If the market is exceptionally nasty (as many anticipate the fall to be), then a further decline is very likely (and I gave my view of the downward targets, together with a denunciation of the appropriateness of using the 200 DMA for a stock like NITE that has rocketed up in this short a span of time – here:
Message 10625094 ).
Meanwhile, I see the upward movement potential as very limited, because of the extensive technical damage done to NITE (I spoke of this often). Further, there is not much to look forward to (unless NITE makes some dramatic PR announcement which casts the FA in a very positive light). And the markets are very jittery and likely to go lower rather than higher. As a result, the upside potential is limited at this time. I have established an *investment* position at 48 1/2, but I also recognize that NITE is likely to be in something of a trading range. I will therefore use this opportunity to do some trading with a separate batch of NITE trading shares, and lower my mean cost of owning NITE.
Sorry if this is not as neat, cut and dry as the pennant formation you referred to. But I hope I have shown in detail, why just looking at “neat, cut and dry” TA, can be very misleading. Which is why, the moment Mr. Raymond Norris appeared to spam his worthless site, I immediately objected to it, and have consistently fought his misconceptions and ignorance. Such “TA”, is worthless or destructive, and his site is representative of that - charts with simplistic “inverse head and shoulders” without reference to any other factor. What inevitably happens, is that he then has to revise his conclusions (with double talk), forced by reality of what HAS occurred. He then provides a new analysis – just as mistaken, hopeless and misguided as before. That is why I called his site worthless – not only is it riddled with factual errors (which we tried to correct on this board – his absurd mix-up about how many shares were outstanding and in float, etc.), but also utterly useless, in fact DANGEROUSLY MISLEADING. You cannot rely on it for facts, you cannot rely on it as a trader for short term guidance, and as an investor, you should be interested not in “inverse head and shoulders”, but in solid FA. In short, his site is good for nothing. I may seem harsh in fighting his misconceptions, but I have seen the damage incorrectly applied TA can do to both traders and investors, and I wanted to sound an alarm about a site that is particularly pernicious (that he dared to spam it here, was just adding insult to injury).
Morgan |
