A Technicians Persepctive

"Noblesse oblige – but not in the stock market, because the tape is not chivalrous and moreover does not reward loyalty." - Edwin Lefevre an excerpt from Reminiscences of a Stock Operator

Technical analysis is the stock market voodoo.  It is the use of stock charts which present historical stock price movements in an effort to extract an understanding of where the stock price may go in the future.  Using anything from a simple ruler and pencil to complex computer generated buy and sell signals the technician places his bets based on the chart movements in the hope that the pattern will repeat itself and he can extract a profit from the trade.

While to many this is gambling, to the technician it is an art form and speculation.  Particularly if you consider the market is efficient and everyone has access to the same information, the only edge is to be better at chart analysis than the rest of the pack.  For this reason high frequency traders try to get as close to the source of the data as possible (literally next door if possible) so that they can receive the data a split second before everyone else.  With their computers humming that millisecond can make all the difference between profit and loss on a trade.

My technical trading relies more on momentum than millisecond trades.  To me the more that you trade the less you make as all of your profits are eaten by the fees and slippage.  Given this perspective I have taken a look at the markets and I must say I may have to dive in again as there seem to be some clear momentum trends unfolding that could make me a lot of money.  I will limit my analysis to the stock market for this blog but I have my eye on numerous other markets which are exhibiting signs of breaking through resistance and support barriers.

When looking at a chart of the S&P 500 it is good to look at differing time frames.  For example the 15 minute chart may be showing a good day while the daily chart is bearish and the weekly chart is also bearish but the monthly chart is bullish.  This is the technicians dilemma, which chart should have the most weight?  Personally I find the monthly chart to be a good overview of the macro circumstances while the 15 minute chart is just a quick look at the daily action.  Outside of these I spend most of my time on the daily and weekly charts.

So starting with the monthly chart it appears that the recent bull run from 2009 is running out of steam.  While the trend is still intact it is perilously close to breaking down.  Factoring in that we are in the weak season for trading as typically markets struggle during the summer months and, on the surface, it appears that the market resilience may overcome the struggles of Europe.  That said the macro economic environment is still far from averted so at these levels it can easily see a retracement to the 1,025 mark from 1,362 today.

The weekly chart is less bullish as the chart broke the 20 week moving average and has rebounded but on light volume.  Certainly the news from Europe this morning was good but in all honesty it is still a temporary fix but it may allow the market to maintain its momentum for the next few weeks.

The weakest of the charts is the daily chart which has viloated the 200 day moving average a number of times recently only to recover on some hope of economic improvement.  The housing data out of the United States is certainly encouraging and I am hopeful that it can turn into a decent trend but unless the employment picture can change relatively quickly which looks doubtful this might be a temporary blip.

Overall the picture (outside of today's rally) is weak and if there is a violation of the 20 month moving average on the monthly chart I would expect that there will be a lot of downside to the market.  For this reason I feel it might be a time to get ready for a momentum trade but I am afraid to say that the setup appears to be to the downside.