Saturday, August 16, 2008


First time I heard about 'technicals' was back in 1997. I even went out to buy a book about the Elliott wave, which I quit reading after a few pages... I was pretty busy then, you see, on day to day tasks, and thought it'd be a waste of time studying that stuff any further.

A few days ago, during a routine surf, I accidentally fell upon a guide on technicals (like for 'dummies' sort of thing), at Investopedia, and went back to give it another try and understand few basics, second time for good. Don't know for sure but it seems to be working better this time. The guide is simple and most things seem to make sense. On the other hand, I am one of those weirdos who actually enjoys math and stats and charting like others enjoy... baseball! This helps too.

For those of you who don't have a clue what I am talking about, don't worry... life can still be beautiful without technicals. In a nutshell, technicals is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity!

So, it's about guessing future trends and price behavior of a given security based on calculated values of all sorts of indicators, triggers, oscillators, and accompanying charts (click the picture to get a feel).

Technical Analysis is based on three interesting principles:

1. The market discounts everything.
2. Price moves in trends.
3. History tends to repeat itself.

Look at the AAPL technicals charts above as an example... click on for sharper view. These charts were generated yesterday by, after the market closure. Check-out the two indices, RSI and CCI. These are numbers that point to 'oversold', and 'overbought' states of a given security. The previous day, Thursday 14th, both indices were pointing to an 'overbought' state for AAPL that for all 'technicals' aficionados should trigger a 'sell' signal. A slight breakout out of the Bollinger Bands (check the charts again) and some resistance tested during the last few days in the region of 180 dollars were more than enough to suggest that AAPL should be on its way down, at least in the short term. The market was up (both Dow and Nas) for most of the day. Oil losing points for some time now and the dollar gaining grounds vis-à-vis the Euro to levels unseen for a long time. Eventually, the Nas finished the day almost flat and the Dow was up a modest 0.38%... And... how about AAPL? Well, it dropped 2%. On a regular day, for top rated stocks like AAPL, a 2% drop in price is huge! How was this justified?

I don't know... and having studied that stuff for only a few days, I can't possibly pretend I understand even half the story. Seems plausible though that some heavy duty traders based on chart signals similar to the ones I discussed above started to short the stock. If that is true then it feels like we should all go study the technicals. Especially those of us who like to invest and collect profits short term may discover that learning to read the charts is most likely worth the effort.

No comments: