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The Art of Technical Analysis

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Use charts to anticipate action.

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There is a fine line between absolute predictions and anticipation. It is this fine line, when crossed, that I believe gives technical analysis a bad rap. Technical analysis is an art form, not a science, and regardless of what anyone says, it will never give you a finite look into the future, merely a glimpse so that you can allocate accordingly in anticipation of what you may think is coming.

Allocating in anticipation is truly the "art" in "chart" but moving into finite predictions can become very dangerous.

A few days ago, for example, my first purchase for the FlexFolio was Apple (AAPL). Did I have any idea that the market was going to bounce on Tuesday led by technology, or did I set a $140 price target after my addition? Heavens no, but when I viewed the chart, I merely saw light volume consolidation, hinting at the possibility of another move higher, coming down the pike. Since my stop point was relatively close, in that being proved wrong wasn't that far away, I deemed the risk reward in my favor and stepped in.

Technical analysis can be a great tool for surmising risk reward for entries and exits. Regardless of what you believe about the art, it is human emotion which drives stocks in the short term, which correlates directly with the price action. If you simply follow the footprints of others, gaining an understanding of where critical support and resistance levels lie, you will much improve your trading, and remove much of the emotion behind your moves.

Lately, I have been watching Archer Daniels Midland (ADM). The stock has been consolidating around the $46.00 level for the last two weeks. The price also happens to correlate with a climactic reversal on the 4th of February in addition to the 2007 highs, which ended a stellar run. While most would consider it ironic that this price point also served as the stock's 2006 high, I merely conclude that there are quite a few who are emotionally tied to this area. When I view the chart, the first thing I see is that if this price point were to be breached, it would possibly indicate that those who have been selling at this emotional level were possibly done and new hands had entered the stock. Again, it is important to understand that I am not predicting nor am I jumping to conclusions, I am merely assessing the price action and gaining an understanding for the action.

Because I see that a move below the $44.00 level would negate the potential for a break in the near future, I can conclude that I have an approximate 5% downside if I were to enter now, with unlimited upside should the stock break out. While it isn't a guarantee, I believe the risk reward is favorable enough for me to start a very small position to keep on watch, with the goal of adding or shedding when the price action tells me to do so.

Anticipating moves is key and as mentioned above, what I believe to be the "art" in "chart," but those who go to the next stage and predict are stepping beyond the bounds of technical analysis altogether.

EMAIL US OR CALL 212-991-9357 TO GET A FREE 14 DAY TRIAL OF FLEXFOLIO & HAVE ACCESS TO QUINT'S PORTFOLIO AND GET EMAIL ALERTS WITH EACH TRADE.


Position in AAPL and ADM.

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