The Trend Is Your Friend – Until It Isn’t

August 16, 2007 at 12:53 pm  ·  Category: Technical Analysis

The fundamental tenet of technical analysis (i.e. chart reading) is “the trend is your friend”. 

Now, I think there’s a lot to this.  Trends tend to be based on economic and financial forces.  As long as those forces remain in play, the trend should continue.

The problem is that “the crowd is right during the trend, but wrong at both ends”.  Trends exhaust themselves and at those times we have turning points.  Charts don’t really have resources for catching turning points until well after the fact.

David Gaffen at the WSJ’s MarketBeat blog put up an interesting post on two technicians who disagree about what the S&P’s breach of its 200 Day MA means. 

John Kosar says that you usually get a bottom when you get a breach of the 200 day MA combined with current measures of investor sentiment, volatility and price action.  The fact that we haven’t leads him to believe that this is a turning point.

Vinny Catalano, on the other hand, thinks the technicals are still holding up and therefore that the bull will come roaring back.

I like John Kosar’s analysis better because it doesn’t just look at technicals in isolation. 

As I said above, charts don’t have great resources for catching turning points, in my opinion.  I think you have to look at charts in the context of other things like sentiment and fundamentals (micro and macro).  That context gives you the perspective you need to interpret charts.  Because interpretation is always required.

Posted by Greg Feirman  ·  Trackback URL  ·  Link
 

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