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Who Said TA Doesn't Work?

It's not unusual for us to hear someone say that TA doesn't work, or that it's broken, or that the markets are broken, and no less so in recent times with what many have called the most hated of bull markets ever. As a proponent of Technical Analysis, and in defense of those who may be interested in TA but are put off by such comments, just let me say that I could not disagree more.

With that in mind and in the hopes of encouraging you to follow up on your desire to learn TA (or to continue doing so, as the case may be), and without getting too 'technical', I'd like to present you with a few very key and recent examples that have worked.

Consider the 4 monthly charts below with their basic triangle setups and targets hit.

Triangles in the DAX, FTSE, NYA and RUT

Those are, as I said, key indices, and their intermediate term TA has played out perfectly. (The target calculations are based on Thomas Bulkowski's widely accepted measuring rules found at www.thepatternsite.com.) Of course it's easy with 20/20 hindsight, but what is very clear from the charts above is that a very basic TA pattern set up and completed across key equity markets.

From a trading standpoint, the breakouts would be bought and the targets sold, but it goes without saying that it's never without risk. As I said, it's easy with 20/20 hindsight. However, when you combine a pattern with its longer term trend, you can, and do, increase your chances of making a successful trade. Consider the following 4 charts of the same markets looking at their intermediate term trend patterns.

Channels in the DAX, FTSE, NYA and RUT

With that kind of channeling, moving average behavior, horizontal support and momentum characteristics, we'd have to say that an upside breakout was obviously more probable than a pattern breakdown, all other things being equal. All of this basic TA was pointing higher at the time of the triangle breakouts. Furthermore, and as I argued in my May 25th post on my blog, I think a good case can be made that we are still in a very long term secular bull market that still hasn't ended, and that the longer term TA would have lent even stronger support to the decision making process. (By the way, I also argue in that same post that we may actually be in the process of ending that very same long term secular bull market.)

If the basic TA that I have presented above has indeed provided us with valuable information as expected, might it not also be in our interests to move a bit further out in time and see what these 4 key indices are doing longer term?

Long term in the DAX, FTSE, NYA and RUT

In general, they are trading in the region of historical highs. From a technical standpoint we can also refer to them as being at the "top of the range" (in the case of the RUT, price is approaching rising resistance in the upper region of a potential broadening top).

With price having broken out of intermediate term triangles and subsequently hitting respective targets located at the upper boundaries of longer term ranges or other important resistance, technical analysts should be on high alert!


Because it works!

While time and space constraints prohibit me from going on and on with example after example, I do hope that these 4 key and timely examples have helped me to make my case that TA works! Indeed, if you are new to TA, or haven't even contemplated it before but would like to begin, I would encourage you wholeheartedly, and I would do so by saying that even though it does get very complicated and that there is a 'ton' to learn, as you can see from this article, even the most basic TA is well worth the time taken to learn and understand.

And the next time you hear someone say that TA doesn't work, or that it's broken, silently ask yourself "what's really broken here?" ;-)

If you're interested in putting some of these basic principals to work in real time, I've prepared the following exercise for you.

First, a warm up: an intermediate term example in Brazil's Bovespa (representative of one of the few outright bearish exceptions currently out there among world indices). Here we have another triangle pattern, but this time leading downward. If you haven't already familiarized yourself with The Pattern Site, I recommend doing so, and, as it pertains to this exercise, this web page in specific: http://www.thepatternsite.com/st.html.

Do you see how I've arrived at the target placed on the chart below?

BVSP Chart

Now for the real time exercise.

  1. Pull up BigCharts at http://bigcharts.marketwatch.com.
  2. Introduce the SPX chart symbol for the S&P 500, and click on "Advanced Chart".
  3. Select "time frame", select "10 days" and "Hourly", and click "DRAW CHART".
  4. Calculate the triangle breakdown target (using a 'range' in this case with a minimum target based on The Pattern Site rules, and the maximum target based on the traditional calculation using the maximum width of the triangle).
  5. Go back to "time frame", select "6 months" and "Daily", and click "DRAW CHART".
  6. Now select "indicators", select "SMA", introduce "50" just below, click "DRAW CHART".
  7. Manually draw a line connecting the lows, and another horizontal line from April's high (you'll need to print the chart, or to use another program to do this).

The result is what we call a confluence of support, and you just did it on your own using very basic TA - and it works! If you've done this exercise, you've just identified first important support on the SPX!

(Remember, it works in that it identifies levels, patterns, trends, and the like, but it doesn't guarantee results - you need to adapt to how the market responds at any level.)

The more and longer you work with TA, the more you incorporate into your 'tool kit', and the more you know and understand its subtleties (like the psychology of round numbers like 1600 on the SPX - hint, hint, hint), the more confidence you'll have in your work.

It works, and I highly recommend it!

The comments section is for questions and constructive contributions, and I'm here to reply, so please feel free to ask questions and/or contribute. And, of course, you're also welcomed to drop by my blog whenever you like.


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