Some people may think that technical analysis doesn't work anymore, but here's one author's
solutions to today's challenging modern markets.
by Joe Luisi
Having been involved with technical trading for several years, I've noticed that technical analysis doesn't seem to
hold the same promise it once did. Indicators and patterns that were once tried and true are no longer reliable; false
signals and breakouts occur more frequently. Frequent stop running causes moves that seem to make no sense. Over
the years, with computers having become so inexpensive, and data, either real time or delayed, relatively cheap and
accessible, many more traders have become technical. Software packages that once cost $400-$2,000 are now
available for less than $200, some as low as $20. Look at the classified advertisements of a trading publication, and
you can see literally dozens of technical (mechanical) trading systems for sale, with fantastic claims attached.
Moreover, everyone seems to have a system for sale. Five to 10 years ago, those same classified ads had only a few
systems for sale. This onslaught of technology has created a change in the markets, and if you can't see it or prepare
for it, you will become a financial victim.
THE NEW WAVE
Every new technician reads the basics of chart patterns and indicators and applies them to his or her trading, only to
find they don't work. So how can traders overcome this new wave?
On the surface, these problems appear to make perfect sense; after all, the more people following the same indicators
and patterns, the greater the possibility for aberration. If everyone is following the stochastic indicator and it falls
below 30, a classic buy signal is triggered. At that point, thousands of screen-based technical traders who follow this
indicator will call their brokers to buy at the market. This rush to the phones causes a brief runup in prices, and so it
appears that the signal is working out.
However - of course, there's a however - once the buying dries up, and it always does, no buyers are left to propel
the market higher and the only thing left to do is sell. The brief influx was caused by technicians all jumping in at
once. This causes a false move up, because the buy side is heavily favored temporarily. After the last technician
buys, there are no more buyers left in the market at that price, and therefore, sellers take over and the market reverses
direction. The technician scrambles to cover his or her position or lock in a profit, thus adding fuel to the selloff.
Hence, the classic false signal.
Let's look at several examples of how the market can make moves that appear to make no sense at all, and then we
will look at ways to avoid these situations. Finally, we will look at several patterns that I have found to work over