I suspect that technical analysis is a craft that’s often misunderstood.
I, personally, have never viewed the wiggles on my charts the same way that a palm-reader views the wiggles on our hands. Yet, unfortunately, I think that’s the assumed mental construct that technical-analysis doubters hold.
Charts don’t “speak to me,” nor do they tell what will or won’t happen with 100% certainty.
So let’s clear the deck of old misconceptions and misunderstandings. Let’s start 2014 with a much more productive point of view. Start by dismissing the myth of technical analysis as a fortune-telling, black magic-like craft.
Now let’s come to terms with the true value of technical analysis …
The purest representation of the market is its price – the exact price where a buyer and a seller are willing to transact.
Accordingly, technical analysis is simply the study of real market prices… in the past and in the present. It can be as simple as determining the current trend. Is it up? Is it down? Or is it sideways? Those are really the only three options.
Looking at a chart of the S&P 500 in 2013, it’s easy to see the current trend was up.
One foundation of technical analysis says that investors should assume that the current trend will persist until new, contrary evidence convinces us otherwise. That’s why pursuing mostly bullish stock investments made sense in last year’s uptrending bull market.
Say what you want about this market – whether it should or shouldn’t be up – technical analysis will still tell you that the market is moving up. And here, I chose my words carefully. “This market is moving up.” It’s not a forecast; simply an observation.
So… ‘tis the mood of the day, ‘tis the side we play.
Technical analysis also provides guidelines for determining when the trend has shifted from up to down. And I, of course, monitor a number a technical indicators that will alert me as any shift takes place. For now though, we’ll start 2014 by sticking with the trend.
Meanwhile, we can use technical analysis on a smaller scale to find great investment opportunities in real-time. After all, knowing that the current trend in equities is “up” only gets you so far.
For example, taking the ratio of two prices is a good technical analysis trick-of-the-trade that I’ve shared many times with you over the years. Often, they’re one of the best technical tools for spotting profitable trend changes before it’s too late.
On Tuesday, as we were wrapping the year up, I talked about 2013’s fourth quarter bringing a major shakeup between steel stocks and copper stocks. Technical analysis helped me pick up on this significant shift… as it was happening.
Here’s the ratio chart of steel stocks and copper stocks, showing the bullish breakout that ensued during the last quarter of the year:
After seeing this breakout, it became clear to me that steel stocks were getting stronger and copper stocks were getting weaker.
That’s why I sent my Cycle 9 Alert subscribers an alert to make a bullish investment in U.S. Steel (NYSE: X) and a bearish investment in Southern Copper Corporation (NYSE: SCCO). And just a couple of months later we were able to realize gains as high as 82% on Southern Copper and 200% on U.S. Steel.
Ratio charts have also helped me pick up on shifts among global stock markets. Here’s a ratio chart comparing European and developing countries’ stock markets. Recently, European stocks have been showing strength, and emerging market stocks weakness.
Our Cycle 9 Alert portfolio currently holds a long position in a European energy giant that we picked up on the cheap. And if this divergence between European and emerging market stocks continues into the first quarter, I’ll be sharing a number of ways to profit from the shift.
These are just a few examples of how I use technical analysis to guide my investment selection process. The craft of technical analysis is by no means a perfect, or supernatural one. But it allows us to make money, regardless of whether we agree with economic, political or market conditions.
When used in a prudent way, technical analysis provides great tools for assessing and investing within the current market. I’ll use these tools throughout 2014 (and beyond) to help you increase the size of your investment accounts, no matter what the market does.
Ahead of the Curve
Everybody keeps asking me if I think we’re back in a real-estate bubble.