Tuesday, March 4, 2008

Getting Technical-Introduction to Chart Patterns

Yesterday on CNBC's Fast Money program, master chartist Louise Yamada gave her views on where she thinks the market is headed. She showed a multi-year chart of the S&P 500 and said that the (head and shoulders) break of its 1400 support level in early January marked the beginning of the downturn. How far does she expect it to go? Based on the triangle pattern that began near the end of last November, she feels that it can go as low as 1200. She arrived at this number by taking the difference between the November 26th price of 1407 and subtracting it from the December 11th triangle high of 1523 and then subtracting that value (116) from the beginning price (1338) of a new triangle that began forming on January 23rd. I have to say that I think her analysis might be correct. Last Friday, the S&P broke out of its current triangle pattern and is heading down. It's nearing the 1310 support level and if it breaks that, then I believe nothing will stop a drop at least until it reaches the next major resistance level at 1235-1240.

Well, that's all fine and dandy you say, but isn't technical analysis just a bunch of voodoo? Yes, it is, but only when you don't know what you're doing. My goal is to introduce you to some basic concepts so that you will have a better knowledge of why your stocks are behaving the way they do and be able to predict what they might do in the future. Knowing how to spot price patterns, you'll learn how to identify entry, exit, and stop/loss points. Isn't that worth the price of a little education? I hope you'll agree with me that it is, or at least keep an open mind about it.

Over the next few weeks we'll be looking at price reversal patterns and price continuation patterns. A head and shoulders pattern indicates a price reversal and triangles, pennants, flags, and wedges give indications of either a price reversal or a price continuation, depending on certain conditions. These sound like formidable subjects involving a lot of math, but if you know the difference between a rectangle and a triangle and can add and subtract, then you've got all the tools you need. If you don't, then your intelligence deserves to be insulted. And I'll do my part by trying to keep it as palatable as possible. Deal?

Earnings Portfolios Update:
Good News Guys:
Down 2.6% (since inception). VISN has been the clear winner, gaining over 11%. HURC is still the biggest loser, down 13%. Had I owned it, I would have dumped it yesterday when it broke it's Thursday's low.
Bad News Bears: Up 20%. Thanks to recent market bearnishness, all of these stocks have been winners. However, the steam seems to be evaporating from all of them, and if I actually held these positions, I'd be sorely tempted to exit them all right now. Hey, a 20% gain in 4 days ain't chicken feed--that'a a 1250% annualized return!

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