Technical analysts at least look at what really matters when looking at stock prices, the actual prices. Even when we’re looking at the right thing, it’s important to use our heads.
Among the various ways that we can study the movement of stock prices, studying the actual price trends makes the most sense by far, because we’re actually looking at what we wish to study rather than something else. This is in spite of how much others who try to understand stock prices other ways like looking at what might be going on with the companies that stocks are connected to, either individually or in the aggregate when looking at market trends, may disagree.
Those who look at data apart from price trends represent the great majority of analysts out there, and we see their analysis all the time, telling us things such as where they think stock prices should be instead of where they are now. They don’t realize that when their analysis and what actually is happening with these prices disagree, they are always wrong, and they are actually trying to predict something without really looking at what they are predicting.
This happens because they choose to single out one facet of the multitude of influencers on stock prices, current business performance, to the exclusion of all others, and even end up surprised when stocks don’t follow this current performance in the manner that they predict. They even may still try to claim that they are right and the market is wrong, where the market is seen to overvalue or undervalue a stock based upon deviations from their own personal views.
While we don’t want to just exclude looking at what we call fundamentals, the only real value this may have is in looking to project whatever success they may be having or may expect to have into the future. When looking at a stock like Tesla, for instance, they might come up with numbers that have us being excited about their future prospects, and use this as a basis for being bullish on the stock, but just looking at the near term and especially trying to quantify things based upon this shorter-term view just will lead to a lot of confusion and mistaken beliefs.
Stock prices actually are influenced by qualitative factors mostly, at least as far as external influencers go, for example the fact that investors have grown to become very excited about this stock. This excitement provides the qualitative basis to generate the excitement, for instance the idea that their future is seen to be a lot brighter than other auto makers, and then this excitement becomes quantified by how high of a price that they are willing to pay.
As excited as investors have been lately with this stock, it still isn’t immune to other factors, such as the coronavirus scare that we’re engrossed in now, and the stock giving up more than half of their value over the last month has nothing to do with their future dimming, and has everything to do with the present moment, but not the present fundamentals.
You aren’t going to understand stocks at all just looking at last year’s or next year’s business results, because stock prices involve so much more, and while how they are doing does play a role, it really doesn’t play that much of a role and is far from the whole ballgame that fundamental analysts assume it is.
Tesla’s move makes perfect sense to technical analysis, at least when practiced sensibly, because they get that it is the market that moves prices by way of whatever combination of factors it sees fit to be guided by. This includes both the terrific growth of the stock price as people see it going up and want to get in on the fun, as well as its big fall as investors see it going down and flee just for this reason.
Momentum is by far the biggest influencer of stock prices, and the same applies to indexes such as the S&P 500. People see it go up year after year and are happy to keep putting money into it on the long side, and when they get scared like they have lately, they worry and decide to step aside for now at least. Since this is completely outside the model of fundamental analysis, analysts cannot even make sense of these things, but will still try to rationalize them, but not wanting to admit to why stocks actually move will leave them pretty clueless, to an even bigger degree than they are normally.
They may want to claim, for instance, that this bear market we have now is caused by stocks being “overvalued,” by our willingness to drive the market higher than they believe we should have. This selloff has nothing to do with any of that though, as we all know, but they so desperately want to correlate whatever happens with their views that speaking nonsense does not dissuade them, because you have to understand what really happens before you can perceive the nonsense of opposing views.
It’s not that technical analysts do all that better of a job though, but they at least are looking at the right thing. Looking at something and interpreting what is going on very well aren’t necessarily the same thing, and claiming that there are support levels for this wild selloff is at least as foolish as the idea that valuations will save us from the current state of terror.
Neither of these factors are in play right now, and neither influence things very much at the best of times, but especially with the market is being led by panic. A lot of technical analysts have a poor idea of what really moves stock prices either, and make the same mistakes that fundamental analysts do, taking a small piece of the pie and pretending that it is far more significant than it actually is.
We Can Look to the Outside World, But Only in Concert With Movements in Prices
Studying the behavior of markets is considered to be a fringe science compared to the other two main forms of analysis, but in essence, it’s the only approach that can lead to any real understanding. Once again though, doing this in itself isn’t right, only doing it right is right. It’s not so much that we try to understand the underlying behavior of markets when we do this kind of analysis, because the why doesn’t really matter that much, it’s the what that really counts.
We see the markets crashing and we know why, and it’s not that understanding why doesn’t matter at all, as we can project ahead and see this all ending soon and things getting back to normal. If we are really paying attention, we can spot trends that may help us better prepare for our re-entry, if we had enough sense to look to escape this carnage on the long side that is. However, we have to understand that the market always has the final word, and how they see it isn’t just the most important thing, it’s the only thing really.
Technical analysts in general aren’t really as tuned into reality as they should be, although this doesn’t mean they all are like this, as some do focus more on the important thing which is the current trend and looking to measure changes in behavior by looking at price. This is a good time though to look at what some people in the industry are thinking to get a better understanding of how they think and what merit, if any, their thinking may have.
Much of what is taught in the field is quite suspect as it turns out, and there’s no better time to reveal how broken some of the ideas out there may be than when we’re in the midst of a genuine market panic, like right now.
Technical analysts are said to use historical prices to predict future ones, and while this is the right approach, how much value an approach like this has depends on how relevant the history that you are looking at is. The more recent the history is, the more influential it is. A great example of this is looking at what has gone on over the last month, which tells us that things are dropping like crazy, versus looking at longer time frames which include periods of far less or even no real relevance.
Katie Stockton of Fairlead Strategies tells us that “in this environment, you can’t explain the magnitude of the moves you’re seeing via fundamental analysis, or even by looking at things from a macro perspective. But studying charts and prices can give you some guidance as to how oversold markets are, and whether further breakdowns are at hand.”
You actually can’t ever do this very well with fundamental analysis period, because this analysis diverges with reality so much at the best of times. All we have to do is look at the divergences with price and fundamentals, which are considerable overall, to understand why trying to homogenize this data just doesn’t even try to understand things.
If all you can say is that outperforming stocks are overpriced and underperforming ones are underpriced, you’ve said worse than nothing, because the measuring stick has been inverted. The only value that these insights may have is to provide a basis for doing the opposite of what they recommend.
On the other hand, our trying to predict bottoms with technical analysis doesn’t make much sense either. You can study charts day and night and the only insight that you will get these days is that the fear continues. The most you will be able to predict is when this all ends, but only after it does.
We know that markets are “oversold” because that is what happens when we panic like this. This is especially the case now with the incident that is scaring everyone being of such a passing nature.
Technical analysis is, by definition, backward looking, at least if we use the proper definition, and there’s just no way that you can determine from looking at today’s charts when the sell-off will end. We have no business even trying to do this though because these things do not matter, as we will know when the market decides it is ready to stop. Until then, we’ll just be looking at the lines on our charts continue to go down.
If someone is shooting at you on the street, you might think that the shooter is a pleasant looking fellow, but that won’t matter as his bullets ricochet around you. This is like looking at either valuations or magnitudes of declines and thinking that this will put an end to things. When people run for their lives, they are not even looking at these things, nor is it reasonable to expect them to.
Proper Technical Involves Waiting for Change, and Then Knowing What to Do in Response
The proper view from a technical perspective is to just watch the action and make your decisions based upon how it all unfolds. If we are investing, this will also require to look out into the street, into the real world, and use that as a marker, but unless price moves in harmony with this, it cannot be time yet. This is not a guessing game though but guessing is not required at all and is a bad idea actually.
Robert Sluymer of FundStrat Global Advisors observes that “at times like these, price is news. It is often the only guide investors have during a panic.” This is true, but we worry from this statement that he thinks price may not be such a big deal at other times, which would be a real mistake, because it always needs to be our guide, now or ever.
It is not so easy to just look at price though, as what we need to be doing as technical analysts is to interpret the data as well as observe it. The ability to do this is what separates the good analysts from the wayward ones. We’ve had plenty of back and forth and you don’t want to jump in after one good day just to get clobbered when stocks resume their alarming downward course the next day for instance.
A trader could make a field day from these things, and you don’t even need much skill at all to trade these moves, just a little understanding. We could even trade ideas as simple as going with the direction of the market in the first hour and do well, and sell near the close, as unrefined as this is. You could set someone up with 4-hour bars and just tell them to hold in the direction of their trends and you’d do even better.
Investors who have stepped aside just want to know when the time is to get back in, and for that, we have to wait. When we watch a fight, one or the other combatants may end up being on the mat for a time, but we need to wait to see who emerges victorious to know when the fight is over.
Andy Addison of The Institutional View had been watching the VIX rise from normal levels to some extreme ones, and this is an example of how we can use indirect indicators to get a sense of what may be going on. If you are long the market and the VIX starts to take off, this can indeed be a reason to run, provided that stock prices are also scared. We can gain an idea of the magnitude of the threat by measuring changes in either, but the VIX can be a handy indicator to watch during panics because it measures it pretty well.
Addison does put his faith in support levels, which are dreadfully over-relied upon generally and are especially meaningless now, because people just won’t be looking at these levels just like they don’t pay attention to how attractive someone might be that is trying to kill you. These levels can influence prices somewhat if enough people spot them and act upon them, program trading platforms in particular, but this isn’t happening, and far from it.
Addison is hedging his bets by saying that he has some sort of expectation that the S&P 500 will find support at 2300, but if it doesn’t, the next stop is 2000-2100, and it might even not hold there. These numbers will not have any influence on things though, because just as we’ve taken out previous support levels like the December 2018 low, no one cares about these things right now.
These levels do not even merit discussion right now, not that they merit much anyway. We especially want to be careful using the concept of support and resistance with indexes, because of the fact that they are a conglomerate of stocks with support and resistance levels of their own. Even with individual stocks, you have to consider the potential impact of this alongside everything else that is going on, and when we’re this scared, all bets on such a thing are certainly off.
Addison says he likes health care stocks like Merck, Eli Lilly, and Amgen, but their charts remain far too ugly right now for a chartist to like, unless you find beauty in ugliness. Less ugly but still ugly cannot count unless you do not like to lose big but still don’t mind losing. Sadly, there are lots of investors with such dim goals at times.
Given that these stocks will be out of the spotlight when this all ends soon, and even these stocks are losing in the midst of this, it does not make sense to be bullish on any of them right now, although if their charts merit at some point, and to the degree that they look better than other stocks, that’s a different story, one with actual substance.
He bases this upon these stocks declining less than average, but that in itself suggests less potential, not more. If we want to cash in on the over-reaction, we need to measure the cost that this virus itself has inflicted on a stock so once it goes away, the road to equilibrium will be longer and have more profit potential.
Sluymer apparently owns a working crystal ball and sees the market leveling off in either April or May at a level of 2346, the December 2018 low. We’ve already waved that goodbye though, and none of us should even pretend to know when the panic ends, because there are just too many variables involved. She claims to be aiming her crystal in the direction of the past, but there’s nothing that has happened before that is relevant enough to even consider, let alone rely on.
Predictions like this might be entertaining but have no real value, unless someone thinks he’s a true wizard and is willing to put their money on it. Bets like this are never good because you never want to base your decisions on wild guesses like this, as opposed to just waiting for it to happen first and then act.
The timeline seems reasonable enough, but this can only be an intellectual exercise as the probabilities involved are not strong enough to ever want to put money on and expect an advantage or anything but being at a disadvantage, given how volatile things are.
Stockton tells us that she pays particular attention to support and resistance levels, even though this has varying degrees of influence, and none right now. Each time we approach a certain level, conditions will usually differ, and while this can be a good tool when something is trading in a range and the market is playing our game, but when they are not, and we are trying to play a different game than the market, the market is always right and we will just be left wrong.
In times of extreme movement such as this, we never want to suppose too much, especially when we look to make the past much more relevant than it actually is. Where we went to in 2018 has absolutely nothing to do with today, and not surprisingly, the market did not have a bull party when we hit this level, and there was no reason why they would.
There is no way to understand stock prices that does not involve at least a decent amount of thinking, and we especially do not want to be wedded to ideas that we just continue to use when doing so doesn’t make a lot of sense.
The study of stock prices can be done both successfully and profitably, but only to the degree that we use our heads enough. Sometimes we just have to go with “where it stops, nobody knows.” We shouldn’t even care, as we can just ride either bulls or bears and root for whoever we’re with.
We don’t really know yet when it ends with any meaningful degree of certainty. We can guess for fun, but not for profit. When the bottom shows us its face, and on our charts, reaches up with an arm that does tell us it is ready to rise again, we will then know.