It amazes me how we're almost in 2016 and you still hear what I consider to be intelligent and experienced market participants talk about technical analysis as a self fulfilling prophecy. A statement that technical analysis is self-fulfilling is suggesting that there are events in the market that are caused directly or indirectly by the preceding prediction or expectation that it was going to occur by a group of market technicians. I can understand when a new investor who doesn’t know any better uses the phrase because maybe he/she heard it once before and it sounds smart. That’s just human nature and you can’t fault them for it. But you guys who by now should know better? Come on.
This is a topic that I've brought up before but I think is worth mentioning it again as it has come up in conversation a few times recently. The problem is that this is such a ridiculous claim that I feel stupid even acknowledging it. But I'll address this again anyway.
Last week I invited everyone to jump on a conference call to discuss what I think are the best 10 charts in the world. I don't want you to think that these are just the 10 best trades, or 10 strongest stocks, or anything like that. It's bigger than that. This list is what I consider to be the 10 most important trends, or changes in trends heading into 2016. If you watch the video, I included 2-3 charts or data points as a supplement to each of the top 10 charts. See:Video Here.
For supplemental charts and further explanation of each of the top 10, please see the full video:
The other day I told someone that I never look at the 50 Day Moving Average and that I haven't for a few years. They couldn't understand why. So I had to explain that it's something I used to keep on my charts, but over time I noticed that it created more noise for me than value, so I eliminated it from my arsenal. I've done this with a lot of technical tools over the years and preferred a more Keep It Simple Stupid approach over a more complicated process.
This whole technical analysis thing first started for me back in 2005 when I realized that I didn't know anything about the stock market. What scared me even more was that there were people sitting around me at work who were twice my age, and in some cases 3 times my age, that swore up and down that they had a handle on the market. I guess I was just lucky at the time to be aware enough to realize that these guys didn't know anything and were doing themselves and their clients a disservice.
I'm glad that you guys are enjoying the weekly letters that I've been putting out since last month. Thanks again for all the great feedback you've been giving me via email or twitter and stocktwits.
This week I wanted to take this to another level and have us all jump on a free conference call to go over what I think are the 10 most important charts in the world. This includes US Stocks, International Markets, Commodities including Metals and Energy, Currencies and US Interest Rates. We will also leave plenty of time for specific questions and chart requests from attendees.
If you know anything about me you know that I can't stand when prices are near a flat 200 day simple moving average. It's not that I want to short stocks in those situations. I don't want anything to do with them at all. You're signing up for a headache, I'm telling you. Breakouts tend not to hold and breakdowns usually don't hold either. The reason is that there is no trend when prices are near a flat 200 day moving average. Markets trend by nature, but when they're in this particular situation, they don't. Why would you bother with the one scenario where you know markets are not trending?
I think the S&P500 is a great example of why we want to stay away when price is near a flat 200 day. Headline writers like to make a big deal when price breaks above or below this particular smoothing mechanism, but 99% of the time they fail to mention the direction in which that moving average is heading. Is it upward sloping, downward sloping or flat? This is the more important question to ask. Not that price got above an invisible line today.
When you talk about some of the most valuable tools for market participants, there are very few out there better than the community that is Stocktwits. One of the most difficult things to do is consistently avoid the noise that surrounds the market and changes in the prices of stocks, commodities and currencies. There are too many commentators and headline writers that get paid to make noise and not to try to make money in the market. This increases noise levels and makes it difficult for the average investor to differentiate between what is real and what are click-bait, air-time filling exaggerations. What I love about the Stocktwits platform is that you can curate your own stream. You follow who want to follow and ignore who you need to avoid. If there are users just creating noise and not adding any real value, you don't have to worry. We have the advantage of only seeing information from the users we want to hear from. The noisemakers eventually get booted out anyway. It's a great community and today I wanted to share with you guys who some of my favorite follows are on the platform.
This has to be one of the more hilarious things that smart people say all the time: "The problem with technical analysis is that it only looks at information from the past". This, to me, is a classic case of nonconcious human mimicry. Some of that research in this area of psychology is fascinating to me as humans tend to mirror the behavior patterns of others. In this example, it's clearly just people repeating something that they once heard, and not something they've actually thought through. I mean, come on. The problem with technical analysis is that it only looks at information from the past? As opposed to what? Information from the future?
We talk a lot about the S&P500 and Dow Jones Industrial Average. Lately it's been the Nasdaq100 leading the charge and actually the only index that hit new highs this month. Each of these are popular due to their large-cap components. In other words, these indexes consist of some of the biggest companies in America and most are household names like Apple or Microsoft, Exxon Mobil and McDonalds. These indexes are either cap-weighted, where the largest companies represent the largest percentage of the index or price-weighted, as in the Dow Industrials, where the highest priced stocks represent the largest holdings in the index. Today I want to focus on a broader equally-weighted index to get a better idea of what the market as a whole looks like.
Guys, let's just get something straight: we do not live in an average world. We never have lived in an average world. We most likely will never live in an average world. That's just math, or science, or both I don't know. But it is a fact. Think about how funny it is to hear someone say, "Well, on average XYZ goes up 2% after earnings". Really? What the hell does that have to do with anything? So you mean a few times it lost over 10% overnight, a few times it rallied over 10% overnight, sometimes it fell somewhere in between.....so "on average" it goes up 2%? Are you kidding me? Are we trying to make money and manage risk or fill airtime with irrelevant facts so we can sell more ads?
Today I want to bring up something that I discuss often, but I'm not sure that I ever explained clearly in a blog post. Long-time readers know that I only use a handful of tools as a supplement to price action. I want to reiterate "supplement", because price is the most important indicator we have, it's the only one that we can actually trust, and the rest are there simply to add confirmation or help dissuade us away from our thesis.
The 200 day moving average is one that is mentioned a ton throughout the financial media and twitterspheres of the world, but is often misinterpreted for whatever the reason. Usually the 200 day is referring to
