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Thursday, February 18, 2010

Why stock market technical analysis chart patterns act like airport windsocks

One of the interesting aspects of writing a blog is that I get almost instant feedback from readers. It is a real joy when my posts on technical analysis of stock index chart patterns motivate some of you to get interested in the subject.

Carl Swenlin, a self-taught technical analyst, has been involved in market analysis since 1981. A pioneer in the creation of online technical resources, he is president and founder of, a premier technical analysis website specializing in stock market indicators, charting, and focused research reports.

Below his weekly technical analysis posts is the following comment:

'Technical analysis is a windsock, not a crystal ball. Be prepared to adjust your tactics and strategy if conditions change.'

(If you have never seen a windsock or don't know its purpose, here is a link that will enlighten you.)

One of the reasons that technical analysis of stock market chart patterns doesn't find favour among many well-known stock market gurus (like Warren Buffett, Peter Lynch and others) is probably because they don't need to use it.

They are like the 'jumbo jets' of the investment world that can take off and land in fair weather and foul, regardless of wind conditions. They have ready access to the upper echelons of the corporate world.

But what about us - the single-engine turboprops trying to fly with limited resources? Wind and weather conditions play an important role in our longevity. We have to use as many tools as are available to make our path to investment success a little less thorny.

Fundamental analysis alone may not help us to reach our goal of financial independence. Why? The Satyam scam has shown how managements out to commit fraud can hoodwink the best known auditors. Even if we are convinced about the management, we rarely have information about the actual operations inside any company.

The collective wisdom (or lack of it) of the market players tend to get reflected in the price charts. If we learn to identify similarities in price patterns from stock charts, it gives us an idea about which way the wind is blowing.

What these chart patterns can not reveal with a high degree of accuracy is which way the wind will be blowing three months or a year later. But, like a windsock, they can be very useful when we decide to land ('sell') or take off ('buy').

1 comment:

Anurag said...

That is very nicely said. Tech analysis is like the market barometer. And, as rightly said a very useful tool for timing entry and exit. Less so for choosing Stocks.