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"Can I be honest with you?"
I hate it when people ask me that. As if I’m going to respond, “No, lie to me.”
But the truth is, it’s usually a preface that suggests we’re not going to want to hear what we’re about to be told.
So... can I be honest with you?
I have no idea what’s going to happen in stock markets or bond markets this week.
We are at a critical juncture for both stocks and bonds, and this week might be huge.
This past week was ugly, as in really ugly. But, as ugly as it was, U.S. equities are hanging on (by a thread) to their upward bias. As far as the rest of the world, it’s pretty much the same; however, there are cracks everywhere.
From a technical perspective, we are in a very dangerous position. If we don’t see a good rally early in the week, we might be in trouble. If we see a hard sell-off before Thursday, we could be on our way to testing this year’s lows, or breaking them.
Sorry, but I feel I have to digress here for a moment. This is for all of you who just sighed when you read the word “technical” and thought “technical analysis, that’s like reading tea leaves.” Can I be honest? If you think that, you are an idiot. Sorry, just being honest.
Technical analysis is not a matter of random hash marks on a graph accompanied by lines with circles and arrows. Where do you think those marks on that graph came from?
Technical analysis is all about psychology. It’s a reflection of investor activity and the mindset that accompanies it.
The marks on a bar graph reflect the high and low prices of that day. There can also be little marks on each vertical line that show the opening price and the closing price, too. When you string a lot of daily prices together on a graph, it is exactly what happened when investors and traders (we’re all traders now, I’m just appeasing you out there who don’t know it, or are fighting it) bought and sold whatever instrument you’re looking at.
What you may not realize is that things like “support” and “resistance” (to name the most often cited technical analysis tools, though there are many other excellent ones) are places where traders made actual decisions with their money.
A support line, for example, reflects where a stock, an index, a commodity (it doesn’t matter) experienced buying interest. The instrument was going down and stopped declining, because buyers stepped in, and selling abated. A resistance line would reflect the opposite.
That means that people actually took a position at that juncture.
In the case of support, buyers stepped in and maybe short sellers stepped to the sidelines. Then the instrument rises in price. Maybe it comes back to that support level a few times (the more times an instrument touches its support or resistance levels, the more important those levels become) and each time buyers again step in the instrument goes higher, again.
If you think that technical analysis is mumbo-jumbo, think again.
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.
Dear Shah:
Your are correct when you say technical analysis is all about psychology. Or what I would like to add: Group Psychology. But the germane question omitted in your piece is:
What is the correlation of Group Psychology, to Intrinsic Value?
Quoting Benjamin Graham:
"In the short run, the market is a voting machine but in the long run it is a weighing machine."
All of us being privy to the real time Group's psychiatric report, via on-line quotations, what is really important to determine is whether or not the Group is psychotic.