Technical Analysis: Three Patterns to Be Aware of Immediately

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Technical analysis has always been rejected as a study of lines and charts without any real concrete or profitable results.

And clearly, an exhaustive debate on its usefulness would be long-winded, especially against those that only subscribe to fundamental analysis, as Warren Buffett does.

“Technical analysis is fundamentally flawed,” says Forbes.

“Technical analysis is stupid,” blared The Motley Fool.

“The poor reputation of technical analysis is well deserved.  It’s their own fault really,” commented Following the Trend.

But it’s just not true.  Technical analysis is just as important as fundamental analysis.

As technicians have learned from Jesse Livermore, for example, “The price pattern reminds you that every movement of importance is but a repetition of similar price movements, that just as soon as you can familiarize yourself with the actions of the past, you will be able to anticipate and act correctly and profitably upon forthcoming movements.”

At its very core, technical analysis is the study of market behaviors, the psychology of fear and greed, which essentially drive all stocks.  While fundamental analysis focuses on the nuts and bolts of a company’s engine, technicians are concerned with supply and demand, and points of support and resistance.

In short, it’s essential because without it, you could miss out on key turning points.

In June 2018, it was safe to say the market was in train wreck-mode.

In fact, on June 19, 2018, the Dow Jones fell more than 350 points on fears of trade war escalation with China.  At the time, President Trump threatened to impose another $200 billion of tariffs on Chinese goods if Beijing follows through with its promise to retaliate against our first round of tariffs.  “Further action must be taken to encourage China to change its unfair practices, open its market to United States goods, and accept a more balanced trade relationship with the United States,” Trump said.

Along with it came two key technical setups all traders should be aware of.

For one, the Dow Jones began to break through its 50-day moving average to the downside.

Should we break below that line in the sand, there is then the possibility of us challenging the 200-day moving average at triple bottom support at 23,500.

So it’s essential that traders be very well aware of even the possibility at the 50-day.

Two, we want to make sure that if the Dow Jones does break below its 50- and 200-day moving averages to test triple bottom support, we need to watch to see if prior triple bottom support remains in place.  If we were to shatter that line in the sand, the Dow Jones could set up for a incredible decline and become negative for the year.

Three, we want to make sure that the Dow Jones doesn’t fall through the bottom of a descending wedge pattern that appears to be setting up.

If it does, that could cause reason for concern, as well.

That’s because a descending wedge — a consolidation price pattern composed of lower swing highs pushed lower by an established downtrend made up of a series of swing lows – can lead to a breakdown in the markets.  In fact, about two-thirds of the time, a descending triangle pattern can lead to lower prices, and greater fear of a more sizable shift to lower lows in the market.

Let’s look at a chart of the Dow Jones again for example with trend lines drawn.

One line is drawn horizontally connecting lines of support.  The other connects the downward sloping price peaks atop.  Once you connect these you begin to spot the triangle.  Fear of further downside then begins to appear if the price of the index begins to make a sharp, meaningful move below the lower line of the triangle.

Of course, it’s always a wait and see with technical situations such as these.

This is the exact reason why it’s essential to pay close attention to technical set ups.

However, trend lines shouldn’t be used as a sole indicator.  Be sure to confirm your findings with other momentum indicators to spot set ups, including Bollinger Bands (2,20), RSI, MACD and Williams’ %R, which will all tell you when to be fearful, and when to be greedy.

Also, don’t be quick to panic…

The key to doing well even in pullbacks is to remain calm. The last thing you want to do is sell everything. By doing so, you miss out on the resiliency rally that follows.

Remember, even in absolute times of panic, money can be made.

  • As even Warren Buffett will tell you, “Be greedy when others are fearful.” 
  • As Baron Rothschild would tell you, “Buy the blood in the streets.”
  • And as Sir John Templeton would tell you, “Buy excessive pessimism.” 

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