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Mainstream is the Best Stream



The semis are setting the tone for the day, as tech is heavy off of earnings announcements from Texas Instruments (TXN: NYSE) and Novellus (NVLS: NASD.) After opening higher the S&P is coming back in and testing the 1150 level that we broke through yesterday. We are seeing the XAU firm up after holding the mid-Jan low of 96.25. It is currently trying to trade through 100 and a close above that level would be bullish.

One thing that I wanted to touch on is technical analysis. Most of my trades are derived from one of two things. Either I am looking for a catalyst to move a stock (i.e product cycles, earnings, etc.) or I am buying/selling something because of its chart. Recently, with the market flying high I am reading arguments from technical bulls and bears on why to buy/sell right now. One thing that I have noticed is people's propensity to use technical indicators that are not mainstream. Instead of using a 50-day Moving Average, they discuss the 8-½ week MACD indicator (not real) that only one-person looks at!

This bothers me because the only reason technical analysis works, is that it is highly subscribed to. That's not to say that one cannot invent their own system that uses a multitude of indicators, but one thing that I have found is that the basic indicators work. Why do they work? Because everyone is looking at the same chart and expects the same outcome. Why does a 50-day MA hold? Is it because everyone is selling? No it is because everyone is trying to buy at the same level!

Trendlines, retracement levels, moving averages, oscillators are the things that work in real time. You will always be able to find some "technician" that says his system IF USED over the past 30 years would have generated a 2000% percent gain! What a crock! My point is that when trading, understand why you are buying/selling and for what reason. That way if a trade moves against you, there is no emotion simply because your parameters were set when initiating the position.

The current market landscape contains so much emotion. We are at the top of the recent range, there is pressure to perform in the coming year and there are people who saw the tremendous gains achieved last year and want a piece of the action. I for one am keeping my stops tight and at the first sign of trouble bailing out. These highly emotional times lead to choppy sessions so stick to your disciplines. Good luck.

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No positions in stocks mentioned.

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