The weight of days
A reader writes...
Hi, David,
I recently "discovered" your blog, and would like to personally thank you for spending the time to share your investing/trading ideas and knowledge. I have developed only within the last 6 months an interest in technical analysis, and have tried to read and absorb as much as I could through books and web articles.
What is extremely valuable about your blog that I have realized within the last few weeks is the fact that I've learned more about the art of technical analysis through your deceptively simple charts than numerous superficially complicated ones in books and articles, which are usually filled with various indicators, moving averages, Fibonacci retracements and Gann levels. Most of the time, however, the authors of those exotic charts can't derive any significant conclusion about the probabilistic direction of future bars on the right edge of the chart; rather, they dwell on what has already manifested on its left side.
For example, trend lines are mentioned in every technical analysis book; however, I've never seen anything even close to your primer on trend lines. Most books talk about stochastics' formula, and overbought/oversold levels, but not too many mention overbought can get more overbought and oversold may beget oversold when the trend is continuously gathering strength. Most "stock guru" sites would mention something like: "... don't like it here, too overbought, just keep it on the radar, or wait for a pullback...", and the next thing I knew, the stock shot up like a rocket.
Also, I've never come across a detailed discussion of price and volume action similar to those that appeared many times in your blog. I've learned about basic chart patterns like head-and-shoulder, double and triple tops/bottoms, island reversals, triangles, wedges, bull/bear flags and so on, and popular indicators like moving averages, Stochastics, RSI, MACD, OBV, CMF, etc. Understanding that all of these indicators are derived from price and volume, I've realized that - like you mentioned - the ability to read chart based on price and volume action, together with trends and patterns, is much more important and essential than trying to interpret charts through derivative indicators, which all books that I've read do.
I've found several articles at other websites/blogs discussing the "collapse" of AAPL, or the "head-and-shoulder demise" of GOOG on more than one occasion, and not surprisingly, became confused with conflicting emotions until I studied your analyses of these stocks.
That said, being a novice, and not having found much information in books or articles regarding the interpretation of price and volume actions, other than the basic "breakout/breakdown of a base, or cup-with-handle on high volume, pullback on light volume...", I've experienced difficulty in trying to interpret charts without the use of any indicator. Personally, I've found the following useful: ROC/Momentum, RSI and Stochastics for momentum and divergences, moving averages and ADX for trends, and candlesticks.
I'd like to have a few questions if you don't mind:
- I've never seen you mention any particular indicator, except a few moving averages on price and volume charts. Have you ever used any indicators, or found them useful at all?
- There are quite a few different types of moving average, like EMA, WMA, and adaptive" moving averages suggested by Tushar Chande and Perry Kaufman, all of them touted as being "superior" to simple MA; a particular website even claims that SMA "barks twice"! However, I've found that all of them have advantages as well as drawbacks, being more sensitive also means more vulnerable to whipsaws. From your experience, which type of moving average have you found most useful for your analyses?
- Sometimes you mentioned about tape reading, and like price/volume action, I haven't found much information on this subject. Did you refer to the process of interpreting level 2, bid/ask, time&sales, specialists and market makers' activities for a particular stock, or did you refer to the process of analyzing market indicators like VIX, TICK, TRIN, A/D lines, McClellan Oscillator/Summation Index, put/call ratio, open interest and sector strength, etc.?
- Are there any particular books on technical analysis that you'd recommend, especially those emphasizing pure price/volume action, patterns and tape reading?
Once again, thank you very much for your time and the wonderful blog.
Well, Tom, you have come a long way in a short time re your study of technical analysis. Congratulations. And thank you for your generous and kind words.
Tushar Chande and Perry Kauffman are each smarter than me, so I defer to their intelligence when it comes to these matters. But when it comes to charting and other forms of technical analysis (TA), I prefer visual clues and cues, and not especially studies. I recall several years ago while at a TAG seminar laughing with Tushar Chande that if he had his way, people would trade the derivatives rather than stocks. He agreed, thinking such activity to be “purer”. (Spoken like the engineer he was!)
I prefer not to 'game the system', but to view an opportunity as close to its source as possible, which means (re equities) price, volume, pattern, and trend. Yes, from time to time, I might use (John's) Bollinger Bands, or stochastics, or RSI, etc but I never relied on any of them. Simple moving averages, however, are a different matter; perhaps the one “study” or indicator I do rely on. This likely is due to the hierarchy of decision-making when investing; if an investor chooses to invest in a particular company, he or she must
1) Check its price. Is it ‘friendly’ to his needs? (Although this is a horrible misunderstanding.)
2) Determine whether the stock offers sufficient liquidity (volume, including average daily volume) for his portfolio needs.
3) Discern whether the stock trends, in some time frame important to each investor.
4) Determine whether the stock has less risk by having traded sideways to slightly down in an apprehendable area pattern.
All other studies are of secondary importance to these magic four, the continuum. Time is another critical component of my analysis — you can see it implied in two of the four items above. Time helps me to avoid stocks that trend just before that trend is about to expire. I also like Point & Figure analysis, which, oddly, does not include volume.
I mentioned I use simple moving averages. Perhaps they do “bark twice”, but I have found that you can give me a chart with only the moving averages sans price bars and volume information, and I can determine whether to buy, sell, or hold. This is because I am a visual investor. Yes, I have sampled (and sometimes used heavily) all the studies at one time or another, and found that my differential advantage and therefore value is pattern recognition. I have spent a lot of time over many decades studying patterns so that I know what comes next from a specific set-up or pattern. Not everyone can do this, nor should they try. My objective is not to dissuade you or anyone from using studies, if they provide meaning for you. I want to limit my analysis to those items that will make me money; I buy the stock and not the study.
As humans, we believe the less complex an answer the less meaningful it is, especially in something as perceptually difficult as investing. I argue the more complex the ‘answer’, the more likely it is propounded by a charlatan. Successful investing is simple; we make it difficult. This gives the reader the appearance that my analyses are “deceptively simple”. (I prefer elegant.)
Defenestrate all the rules of technical analysis when the market takes a sudden and ferocious turn. Yes, experience brings with it wisdom, but why wait for the confirmation before taking action? A nasty turn in the markets easily could negate a high volume, picture perfect breakout, although the strongest patterns likely will return to their bases, and not lower. Do you have the tenacity to hold through the market weakness without getting scared out at the wrong time? For example, the current market reflects wholesale selling of former leaders — and dumping in the case of the homebuilders. Because the market had become so heavily weighted to the former leaders, selling of them now exacerbates the weakness; that is, it makes the market appear weaker than it is. This is merely another transition phase for the general market, to new leadership from old leadership. I remain long Apple/AAPL, Google/GOOG, Option Care/OPTN, and Teva Pharmaceuticals/TEVA. Excepting Google/GOOG, no holding in my portfolio is sacrosanct.
Here is something another technical analyst said just two days ago about Starbucks/SBUX, an investment I argue for:
SBUX is a good short up to 52.49. If the stock is able to cross that line then cover and move on to other chances. I say it loses its steam and fails and the lows get lower. That much is clear if you examine its pattern of trade. Now it is a timely short with little risk. Little risk because the position is controlled by a stop that will be followed. It’s a simple play.
This analyst, as respected as he might be, simply does not 'get it'. He lacks the ability to place the pattern within spacial context. So he will stop out (look at today's indicated opening), and then argue, "Good try, mates!"
Your questions are not about current market conditions, but I feel practical 'answers' to be more helpful than academic ones. To that end, I argue that, for the nonce, Google/GOOG does not allow itself to be a good analysand -- except by the best technical analysts, of which there exist only a handful -- because its spatial context predominantly is for brief and shallow corrections. Option Care/OPTN merely trembles above its $14 breakout in a fit of "trader's remorse" -- it would have done this anyway while the trend turned to up from sideways, but the general market weakness causes it to linger longer, creating a base upon a base, and a potential positive divergence... All quite bullish, in fact.
You should realize that, as a visual investor, I seek particular setups and patterns that each have specific rules by which they must abide. These patterns include transition phases as well as trends, up and down. Successful investing requires aligning your favored positions with what occurs in the markets; ignoring general market action is a recipe for disaster. Unless your time frame is greater than the market’s oscillations.
Some replies to your specific questions…
● Yes, I have used all indicators, and find them each helpful, some more so than others. With the exception of simple moving averages, I rely on no indicators or studies for my analyses.
● For my purposes, tape reading is essential. I watch my positions and possible opportunities tick by tick; I become familiar with how the spread widens and contracts as investors accumulate or distribute the shares, the lot size—is there an attempt to hide large blocks trades by breaking them down into smaller executions, etc. Tape reading is time & sales, the activities of the specialists and market makers. (Learn about the process of double and triple counting!) Tape reading is not Level 2, however. A good book is Humphrey Neill’s Tape Reading and Market Tactics.
● You will find several books I recommend in the sidebar, including one that includes an interview with me. (Shh, don’t tell anyone!) In addition, I would suggest books by John Murphy, Marty Pring, and of course, Edwards & McGee. My perceptions are taken from each of these writers, and others — including me. They have books, whereas I do not.
● I have excluded your question re Telewest/TLWT because, in light of the buyout, the questions have become moot.
A word of caution, however. Many investors perceive TA to be the pot of gold at the end of the rainbow, whereas I believe that, for most users, TA can be be fool’s gold. Those who use it seem wholly lacking in spatial cognizance—the ability to age a trend, for example. They seem unable to recognize any area patterns, large or small. They seemingly believe a pattern that has the appearance but fails to abide by the pattern’s rules still makes it that pattern. (Wrong!) They seem to believe that because a stock breaks a trend line, it is all up or down from that spot. Wrong again.
Some effort, for example, went into the original post re the then-coming decline in the homebuilders group; recently, I could have done the same with the resources (oil) sector. The point is that the clues, set-ups, and patterns repeat, and reliably so. I hope to share these recognitions many, many times on this blog; sometimes they will be group or sector calls, sometimes recommendations to buy or sell a specific stock. In the end, each post to this blog germane to TA will contribute to a whole. Over time, this blog will represent my attempt at a book that limns my market perceptions, poorly organized though it might be. Save the links for those posts that you believe especially enlightening, and thus create a book meaningful to you.
I hope my attempt at answering your excellent questions provided some measure of help. If not, please ask again…
Hi, David,
I recently "discovered" your blog, and would like to personally thank you for spending the time to share your investing/trading ideas and knowledge. I have developed only within the last 6 months an interest in technical analysis, and have tried to read and absorb as much as I could through books and web articles.
What is extremely valuable about your blog that I have realized within the last few weeks is the fact that I've learned more about the art of technical analysis through your deceptively simple charts than numerous superficially complicated ones in books and articles, which are usually filled with various indicators, moving averages, Fibonacci retracements and Gann levels. Most of the time, however, the authors of those exotic charts can't derive any significant conclusion about the probabilistic direction of future bars on the right edge of the chart; rather, they dwell on what has already manifested on its left side.
For example, trend lines are mentioned in every technical analysis book; however, I've never seen anything even close to your primer on trend lines. Most books talk about stochastics' formula, and overbought/oversold levels, but not too many mention overbought can get more overbought and oversold may beget oversold when the trend is continuously gathering strength. Most "stock guru" sites would mention something like: "... don't like it here, too overbought, just keep it on the radar, or wait for a pullback...", and the next thing I knew, the stock shot up like a rocket.
Also, I've never come across a detailed discussion of price and volume action similar to those that appeared many times in your blog. I've learned about basic chart patterns like head-and-shoulder, double and triple tops/bottoms, island reversals, triangles, wedges, bull/bear flags and so on, and popular indicators like moving averages, Stochastics, RSI, MACD, OBV, CMF, etc. Understanding that all of these indicators are derived from price and volume, I've realized that - like you mentioned - the ability to read chart based on price and volume action, together with trends and patterns, is much more important and essential than trying to interpret charts through derivative indicators, which all books that I've read do.
I've found several articles at other websites/blogs discussing the "collapse" of AAPL, or the "head-and-shoulder demise" of GOOG on more than one occasion, and not surprisingly, became confused with conflicting emotions until I studied your analyses of these stocks.
That said, being a novice, and not having found much information in books or articles regarding the interpretation of price and volume actions, other than the basic "breakout/breakdown of a base, or cup-with-handle on high volume, pullback on light volume...", I've experienced difficulty in trying to interpret charts without the use of any indicator. Personally, I've found the following useful: ROC/Momentum, RSI and Stochastics for momentum and divergences, moving averages and ADX for trends, and candlesticks.
I'd like to have a few questions if you don't mind:
- I've never seen you mention any particular indicator, except a few moving averages on price and volume charts. Have you ever used any indicators, or found them useful at all?
- There are quite a few different types of moving average, like EMA, WMA, and adaptive" moving averages suggested by Tushar Chande and Perry Kaufman, all of them touted as being "superior" to simple MA; a particular website even claims that SMA "barks twice"! However, I've found that all of them have advantages as well as drawbacks, being more sensitive also means more vulnerable to whipsaws. From your experience, which type of moving average have you found most useful for your analyses?
- Sometimes you mentioned about tape reading, and like price/volume action, I haven't found much information on this subject. Did you refer to the process of interpreting level 2, bid/ask, time&sales, specialists and market makers' activities for a particular stock, or did you refer to the process of analyzing market indicators like VIX, TICK, TRIN, A/D lines, McClellan Oscillator/Summation Index, put/call ratio, open interest and sector strength, etc.?
- Are there any particular books on technical analysis that you'd recommend, especially those emphasizing pure price/volume action, patterns and tape reading?
Once again, thank you very much for your time and the wonderful blog.
Well, Tom, you have come a long way in a short time re your study of technical analysis. Congratulations. And thank you for your generous and kind words.
Tushar Chande and Perry Kauffman are each smarter than me, so I defer to their intelligence when it comes to these matters. But when it comes to charting and other forms of technical analysis (TA), I prefer visual clues and cues, and not especially studies. I recall several years ago while at a TAG seminar laughing with Tushar Chande that if he had his way, people would trade the derivatives rather than stocks. He agreed, thinking such activity to be “purer”. (Spoken like the engineer he was!)
I prefer not to 'game the system', but to view an opportunity as close to its source as possible, which means (re equities) price, volume, pattern, and trend. Yes, from time to time, I might use (John's) Bollinger Bands, or stochastics, or RSI, etc but I never relied on any of them. Simple moving averages, however, are a different matter; perhaps the one “study” or indicator I do rely on. This likely is due to the hierarchy of decision-making when investing; if an investor chooses to invest in a particular company, he or she must
1) Check its price. Is it ‘friendly’ to his needs? (Although this is a horrible misunderstanding.)
2) Determine whether the stock offers sufficient liquidity (volume, including average daily volume) for his portfolio needs.
3) Discern whether the stock trends, in some time frame important to each investor.
4) Determine whether the stock has less risk by having traded sideways to slightly down in an apprehendable area pattern.
All other studies are of secondary importance to these magic four, the continuum. Time is another critical component of my analysis — you can see it implied in two of the four items above. Time helps me to avoid stocks that trend just before that trend is about to expire. I also like Point & Figure analysis, which, oddly, does not include volume.
I mentioned I use simple moving averages. Perhaps they do “bark twice”, but I have found that you can give me a chart with only the moving averages sans price bars and volume information, and I can determine whether to buy, sell, or hold. This is because I am a visual investor. Yes, I have sampled (and sometimes used heavily) all the studies at one time or another, and found that my differential advantage and therefore value is pattern recognition. I have spent a lot of time over many decades studying patterns so that I know what comes next from a specific set-up or pattern. Not everyone can do this, nor should they try. My objective is not to dissuade you or anyone from using studies, if they provide meaning for you. I want to limit my analysis to those items that will make me money; I buy the stock and not the study.
As humans, we believe the less complex an answer the less meaningful it is, especially in something as perceptually difficult as investing. I argue the more complex the ‘answer’, the more likely it is propounded by a charlatan. Successful investing is simple; we make it difficult. This gives the reader the appearance that my analyses are “deceptively simple”. (I prefer elegant.)
Defenestrate all the rules of technical analysis when the market takes a sudden and ferocious turn. Yes, experience brings with it wisdom, but why wait for the confirmation before taking action? A nasty turn in the markets easily could negate a high volume, picture perfect breakout, although the strongest patterns likely will return to their bases, and not lower. Do you have the tenacity to hold through the market weakness without getting scared out at the wrong time? For example, the current market reflects wholesale selling of former leaders — and dumping in the case of the homebuilders. Because the market had become so heavily weighted to the former leaders, selling of them now exacerbates the weakness; that is, it makes the market appear weaker than it is. This is merely another transition phase for the general market, to new leadership from old leadership. I remain long Apple/AAPL, Google/GOOG, Option Care/OPTN, and Teva Pharmaceuticals/TEVA. Excepting Google/GOOG, no holding in my portfolio is sacrosanct.
Here is something another technical analyst said just two days ago about Starbucks/SBUX, an investment I argue for:
SBUX is a good short up to 52.49. If the stock is able to cross that line then cover and move on to other chances. I say it loses its steam and fails and the lows get lower. That much is clear if you examine its pattern of trade. Now it is a timely short with little risk. Little risk because the position is controlled by a stop that will be followed. It’s a simple play.
This analyst, as respected as he might be, simply does not 'get it'. He lacks the ability to place the pattern within spacial context. So he will stop out (look at today's indicated opening), and then argue, "Good try, mates!"
Your questions are not about current market conditions, but I feel practical 'answers' to be more helpful than academic ones. To that end, I argue that, for the nonce, Google/GOOG does not allow itself to be a good analysand -- except by the best technical analysts, of which there exist only a handful -- because its spatial context predominantly is for brief and shallow corrections. Option Care/OPTN merely trembles above its $14 breakout in a fit of "trader's remorse" -- it would have done this anyway while the trend turned to up from sideways, but the general market weakness causes it to linger longer, creating a base upon a base, and a potential positive divergence... All quite bullish, in fact.
You should realize that, as a visual investor, I seek particular setups and patterns that each have specific rules by which they must abide. These patterns include transition phases as well as trends, up and down. Successful investing requires aligning your favored positions with what occurs in the markets; ignoring general market action is a recipe for disaster. Unless your time frame is greater than the market’s oscillations.
Some replies to your specific questions…
● Yes, I have used all indicators, and find them each helpful, some more so than others. With the exception of simple moving averages, I rely on no indicators or studies for my analyses.
● For my purposes, tape reading is essential. I watch my positions and possible opportunities tick by tick; I become familiar with how the spread widens and contracts as investors accumulate or distribute the shares, the lot size—is there an attempt to hide large blocks trades by breaking them down into smaller executions, etc. Tape reading is time & sales, the activities of the specialists and market makers. (Learn about the process of double and triple counting!) Tape reading is not Level 2, however. A good book is Humphrey Neill’s Tape Reading and Market Tactics.
● You will find several books I recommend in the sidebar, including one that includes an interview with me. (Shh, don’t tell anyone!) In addition, I would suggest books by John Murphy, Marty Pring, and of course, Edwards & McGee. My perceptions are taken from each of these writers, and others — including me. They have books, whereas I do not.
● I have excluded your question re Telewest/TLWT because, in light of the buyout, the questions have become moot.
A word of caution, however. Many investors perceive TA to be the pot of gold at the end of the rainbow, whereas I believe that, for most users, TA can be be fool’s gold. Those who use it seem wholly lacking in spatial cognizance—the ability to age a trend, for example. They seem unable to recognize any area patterns, large or small. They seemingly believe a pattern that has the appearance but fails to abide by the pattern’s rules still makes it that pattern. (Wrong!) They seem to believe that because a stock breaks a trend line, it is all up or down from that spot. Wrong again.
Some effort, for example, went into the original post re the then-coming decline in the homebuilders group; recently, I could have done the same with the resources (oil) sector. The point is that the clues, set-ups, and patterns repeat, and reliably so. I hope to share these recognitions many, many times on this blog; sometimes they will be group or sector calls, sometimes recommendations to buy or sell a specific stock. In the end, each post to this blog germane to TA will contribute to a whole. Over time, this blog will represent my attempt at a book that limns my market perceptions, poorly organized though it might be. Save the links for those posts that you believe especially enlightening, and thus create a book meaningful to you.
I hope my attempt at answering your excellent questions provided some measure of help. If not, please ask again…
posted by David M Gordon | 6:23 AM
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