Whisper – Chart Attack

Market & Portfolio Update

On my way to Bloomberg Television this morning to discuss Amazon, I received a call from an old trader friend of mine who is now a money manager in NY.  He’s an uber fundamental guy and has always loathed charts and technical analysis.

After watching my Fox Business segment on Tuesday where I offered the same technical information and warnings I offered all of you earlier in the week, he said he finally wants to learn a little more about the charts.

It seems he’s facing a common identity crisis that many Wall Street types encounter at some point in their career.  Maybe you feel the same way?

My friend didn’t believe in the charts or that some lines drawn on a screen can foretell the future of stocks, but after many “more than coincidental” run-ins with technical formations and subsequent movements, he’s becoming a believer.

His question was simply “was it really something you saw in the charts or is this all from the taper?”  I replied “what taper?”

No taper has been announced; in fact, I highly doubt that the Fed will start the taper next week as do most of my constituents.  There was minimal news yesterday or today that would compel the markets to move lower and earnings are also sparse at the moment.  In fact, the passing of a budget deal and better than expected retail sales numbers should have been a huge relief for stocks…The only logical explanation was the breakdown in the charts.

I am not asking him or all of you to put all your faith in some red and green lines or candlestick patterns, but when you have enough people that believe in and act upon them, then you’d be a fool to ignore it.

Moreover, we must recognize the fact that we live in a computerized world driven by algorithms and formulas that buy and sell stocks automatically when certain things (like technical formations) occur.  All of these programs and algorithms are written by the hands of man and many of them simply amplify or execute the writer’s intentions without delay or emption, making them even more powerful and volatile.

It’s kind of like coming up to a red light on a foggy day and NOT stopping because you don’t see anyone from your vantage point.  You KNOW that the other direction of traffic has the green and there is a good chance that another car could come barreling through the intersection.  Take it a step further and think of the other driver with the green being an autonomous car that just goes on green and stops on red without even looking for anyone breaking the rules…that’s a bit scarier, but maybe more appropriate when you are comparing the stock market with it’s automated trading programs.

I view technicals both as a roadmap lights that stocks have a likely path of following as well as a set of red, yellow and green lights that might provide acceleration or deceleration points.  While not all of us follow directions or follow every traffic law out there, it’s good to know what they are just in case.

It is true that earnings and fundamental (balance sheet) analysis are most likely the end all be all of stock valuation, but much can happen in-between earnings reports, so you must as least be willing to learn a little bit about technicals and heed the warnings in the big in indexes like the S&P 500, Nasdaq and the Dow (even though the Dow is mostly useless with only 30 stocks and a price per share weighting).

Watch the major moving averages like the 20, 50 and 200 day averages in the daily charts and always keep an eye on volume trends.  You don’t have to be a wizard, just know what you’re looking at.

I’d also recommend you pick up a book on technical basics if you’re not familiar as it can be 20 bucks well spent.

The Zacks Rank will get you there, but technicals might help get you there safely with a few less bumps.

As for the market, things continued to break down today (moderately) with The S&P 500 giving back another 7 points, or 0.4%, to 1,775, while the Dow lost 104 points, or 0.7%, to 15,739, its third consecutive drop.

The NASDAQ also moved lower and closed below 4,000 level for the first time since November 25. The index, which traded in positive territory for much of the day closed down 5 points or 0.1% to 3,998.

The S&P 500 has fallen for the third day in a row; PPI due out tomorrow.

 Chat soon,

Jared