Pulling It All Together—A Checklist
posted under
Philosophy of Technical Analysis
by ceecabolos
Pullin
A ChecAs this book has demonstrated, technical analysis is a blend of many approaches. Each approach adds something to the analyst's knowledge of the market. Technical analysis is much like putting together a giant jigsaw puzzle. Each technical tool holds a piece of the puzzle. My approach to market analysis is to combine as many techniques as possible. Each works better in certain market situations. The key is knowing which tools to emphasize in the current situation. That comes with knowledge and experience.
All of these approaches overlap to some extent and complement one another. The day the user sees these interrelationships, and is able to view technical analysis as the sum of its parts, is the day that person deserves the title of technical analyst. The following checklist is provided to help the user touch all the bases, at least in the early going. Later on, the checklist becomes second nature. The checklist is not all-inclusive, but does have most of the more important factors to keep in mind. Sound mar‑
ket analysis seldom consists of doing the obvious. The technician is constantly seeking clues to future market movement. The final clue that leans the trader in one direction or the other is often some minor factor that has gone largely unnoticed by others. The more factors the analyst considers, the better the chances of finding that right clue.
TECHNICAL CHECKLIST
1. What is the direction of the overall market?
2. What is the direction of the various market sectors?
3. What are the weekly and monthly charts showing?
4. Are the major, intermediate, and minor trends up, down,
or sideways?
5. Where are the important support and resistance levels?
6. Where are the important trendlines or channels?
7. Are volume and open interest confirming the price action?
8. Where are the 33%, 50%, and 66% retracements?
9. Are there any price gaps and what type are they?
10. Are there any major reversal patterns visible?
11. Are there any continuation patterns visible?
12. What are the price objectives from those patterns?
13. Which way are the moving averages pointing?
14. Are the oscillators overbought or oversold?
15. Are any divergences apparent on the oscillators?
16. Are contrary opinion numbers showing any extremes?
17. What is the Elliot Wave pattern showing?
18. Are there any obvious 3 or 5 wave patterns?
19. What about Fibonacci retracements or projections?
20. Are there any cycle tops or bottoms due? 21. Is the market showing right or left translation?
22. Which way is the computer trend moving: up, down, or sideways?
23. What are the point and figure charts or candlesticks showing?
After you've arrived at a bullish or bearish conclusion, ask yourself the following questions.
1. Which way will this market trend over the next several months?
2. Am I going to buy or sell this market?
3. How many units will I trade?
4. How much am I prepared to risk if I'm wrong?
5. What is my profit objective?
6. Where will I enter the market?
7. What type of order will I use?
8. Where will I place my protective stop?
Going through the checklist won't guarantee the right conclusions. It's only meant to help you ask the right questions. Asking the right questions is the surest way of finding the right answers. The keys to successful trading are knowledge, discipline, and patience. Assuming that you have the knowledge, the best way to achieve discipline and patience is doing your homework and having a plan of action. The final step is putting that plan of action to work. Even that won't guarantee success, but it will greatly increase the odds of winning in the financial markets.
HOW TO COORDINATE TECHNICAL AND
FUNDAMENTAL ANALYSIS
Despite the fact that technicians and fundamentalists are often at odds with one another, there are ways they can work together for
mutual benefit. Market analysis can be approached from either direction. While I believe that technical factors do lead the known fundamentals, I also believe that any important market move must be caused by underlying fundamental factors. Therefore, it simply makes sense for a technician to have some awareness of the fundamental condition of a market. If nothing else, the technician can inquire from his or her fundamental counterpart as to what would have to happen fundamentally to justify a significant market move identified on a price chart. In addition, seeing how the market reacts to fundamental news can be used as an excellent technical indication.
The fundamental analyst can use technical factors to confirm an analysis or as an alert that something important may be happening. The fundamentalist can consult a price chart or use a computer trend-following system as a filter to prevent him or her from assuming a position opposite an existing trend. Some unusual action on a price chart can act as an alert for the fundamental analyst and cause him or her to examine the fundamental situation a bit closer. During my years in the technical analysis department of a major brokerage firm, I often approached our fundamental department to discuss some market move that seemed imminent on the price charts. I often received responses like "that can never happen" or "no way." Very often, that same person was scrambling a couple of weeks later to find fundamental reasons to explain a sudden and "unexpected" market move. There's obviously room for much more coordination and cooperation in this area.
CHARTERED MARKET TECHNICIAN (CMT)
A lot of people use technical analysis and offer opinions on the technical condition of the various markets. But are they really qualified to do so? How would you know? After all, you wouldn't go to a doctor who didn't have a medical degree on the wall. Nor
would you consult a lawyer who hadn't passed the bar exam. Your accountant is undoubtedly a CTA. If you asked a security analyst for an assessment on a common stock, you would certainly make sure that he or she was a Chartered Financial Analyst (CFA). Why wouldn't you take the same precautions with a technical analyst?
The Market Technicians Association (MTA) resolved this question by instituting a Chartered Market Technician (CMT) program. The CMT program is a three step examination process that qualifies the analyst to carry the CMT letters after his or her name. Most professional technical analysts have gone through the program. The next time someone offers you his or her technical opinion, ask to see the CMT.
MARKET TECHNICIANS ASSOCIATION (MTA)
The Market Technicians Association (MTA) is the oldest and best known technical society in the world. It was founded in 1972 to encourage the exchange of technical ideas, educate the public and the investment community, and establish a code of ethics and professional standards among technical analysts. (On March 11, 1998 the MTA celebrated the 25th birthday of its incorporation. The event was highlighted by a special presentation at the New York monthly meeting by three of the organization's founding members—Ralph Acampora, John Brooks, and John Greeley.) MTA membership includes full-time technical analysts and other interested parties (called affiliates). Monthly meetings are held in New York (Market Technicians Association, Inc., One World Trade Center, Suite 4447, New York, NY 10048 (212) 912-0995, e-mail: shelleymta@aol.com), and an annual seminar is held each May at various locations around the country. Members have access to the MTA library and a computer bulletin board. A monthly newsletter and a periodic MTA Journal are published. Some regional chapters have even been formed. MTA members also become colleagues of the International Federation of Technical Analysts (IFTA).
THE GLOBAL REACH OF TECHNICAL ANALYSIS
During the fall of 1985, a meeting was held in Japan with technical representatives of several different countries to draft a constitution for the International Federation of Technical Analysts (IFTA, Post Office Box 1347, New York, NY 10009 USA). Since then, the organization has grown to include technical analysis organizations from more than twenty countries. One of the nice things about being a member is that annual meetings are held in places like Australia, Japan, Paris, and Rome since a different national organization hosts each seminar. I'm proud to say that in 1992 I received the first award ever given at an IFTA conference for "outstanding contribution to global technical analysis."
TECHNICAL ANALYSIS BY ANY NAME
After a century of use in this country (and 300 years in Japan), technical analysis is more popular than ever. Of course, it's not always called technical analysis. In my book, The Visual Investor, I called it visual analysis. That was simply an attempt to get people beyond the intimidating title of technical analysis and to get them to examine this valuable approach more closely. Whatever you want to call it, technical analysis is practiced under many names. A lot of financial organizations employ analysts whose job it is to number-crunch market prices to find stocks or stock groups that are expensive (overbought) or cheap (oversold). They're called quantitative analysts, but the numbers they crunch are often the same ones the technicians are crunching. The financial press has written about a "new" class of trader called "momentum" players. These traders move funds out of stocks and stock groups that are showing poor momentum and into those that are showing good momentum. They use a technique called relative strength. Of course, we recognize "momentum" and "relative strength" as technical terms.
Then there are the brokerage firms' "fundamental" upgrades and downgrades. Have you noticed how often these
"fundamental" changes take place the day after a significant "chart" breakout or breakdown? Economists, who certainly don't consider themselves technical analysts, use charts all the time to measure the direction of inflation, interest rates, and all sorts of economic indicators. And they talk about the "trend" of those charts. Even fundamental tools like the price/earnings ratio have a technical side to them. Anytime you introduce price into the equation, you're moving into the realm of technical analysis. Or when security analysts say the dividend yield of the stock market is too low, aren't they saying prices are too high? Isn't that the same thing as saying a market is overbought?
Finally, there are the academics who have reinvented technical analysis under the new name of Behavioral Finance. For years, the academics espoused the Efficient Market Hypothesis to prove that technical analysis simply didn't work. No less an authority than the Federal Reserve Board has thrown some doubt on those ideas.
FEDERAL RESERVE FINALLY APPROVES
During August of 1995, the Federal Reserve Bank of New York published a Staff Report under the title: "Head and Shoulders: Not Just a Flaky Pattern." The report was intended to examine the validity of the head and shoulders pattern in foreign exchange trading. (The first edition of this book was cited as one of the primary sources on technical analysis.) The opening sentence in the introduction reads:
Technical analysis, the prediction of price movements based on past price movements, has been shown to generate statistically significant profits despite its incompatibility with most economists' notions of "efficient markets." (Federal Reserve Bank of New York, C.L. Osler and P.H. Kevin Chang, Staff Report No. 4, August 1995.)
A more recent report, published in the fall of 1997 by the Federal Reserve Bank of St. Louis, also addresses the use of tech‑
nical analysis and the relative merits of the Efficient Market
Hypothesis. (Technical Analysis of the Futures Markets was again
cited as a primary source of information on technical analysis.) Under the paragraph titled, "Rethinking the Efficient Markets Hypothesis," the author writes:
The success of technical trading rules shown in the previous section is typical of a number of later studies showing that the simple efficient market hypothesis fails in important ways to describe how the foreign exchange market actually functions. While these results did not surprise market practitioners, they have helped persuade economists to examine features of the market ... that might explain the profitability of technical analysis. (Neely)
CONCLUSION
If imitation is the sincerest form of flattery, then market technicians should feel very flattered. Technical analysis is practiced under many different names, and often by those who may not realize they're using it. But it is being practiced. Technical analysis has also evolved. The introduction of intermarket analysis, for example, has changed the focus away from "single market" analysis to a more interdependent view of the financial markets. The idea that all global markets are linked isn't questioned much anymore either. That's why the universal language of technical analysis makes it especially useful in a world where the financial markets, here and abroad, have become so intertwined. In a world where computer technology and lightning-fast communications require quick responses, the ability to read the market's signals is more crucial than ever. And reading market signals is what technical analysis is all about. Charles Dow introduced technical analysis at the start of the twentieth century. As the twentieth century draws to a close, Mr. Dow would be proud of what he started.
A ChecAs this book has demonstrated, technical analysis is a blend of many approaches. Each approach adds something to the analyst's knowledge of the market. Technical analysis is much like putting together a giant jigsaw puzzle. Each technical tool holds a piece of the puzzle. My approach to market analysis is to combine as many techniques as possible. Each works better in certain market situations. The key is knowing which tools to emphasize in the current situation. That comes with knowledge and experience.
All of these approaches overlap to some extent and complement one another. The day the user sees these interrelationships, and is able to view technical analysis as the sum of its parts, is the day that person deserves the title of technical analyst. The following checklist is provided to help the user touch all the bases, at least in the early going. Later on, the checklist becomes second nature. The checklist is not all-inclusive, but does have most of the more important factors to keep in mind. Sound mar‑
ket analysis seldom consists of doing the obvious. The technician is constantly seeking clues to future market movement. The final clue that leans the trader in one direction or the other is often some minor factor that has gone largely unnoticed by others. The more factors the analyst considers, the better the chances of finding that right clue.
TECHNICAL CHECKLIST
1. What is the direction of the overall market?
2. What is the direction of the various market sectors?
3. What are the weekly and monthly charts showing?
4. Are the major, intermediate, and minor trends up, down,
or sideways?
5. Where are the important support and resistance levels?
6. Where are the important trendlines or channels?
7. Are volume and open interest confirming the price action?
8. Where are the 33%, 50%, and 66% retracements?
9. Are there any price gaps and what type are they?
10. Are there any major reversal patterns visible?
11. Are there any continuation patterns visible?
12. What are the price objectives from those patterns?
13. Which way are the moving averages pointing?
14. Are the oscillators overbought or oversold?
15. Are any divergences apparent on the oscillators?
16. Are contrary opinion numbers showing any extremes?
17. What is the Elliot Wave pattern showing?
18. Are there any obvious 3 or 5 wave patterns?
19. What about Fibonacci retracements or projections?
20. Are there any cycle tops or bottoms due? 21. Is the market showing right or left translation?
22. Which way is the computer trend moving: up, down, or sideways?
23. What are the point and figure charts or candlesticks showing?
After you've arrived at a bullish or bearish conclusion, ask yourself the following questions.
1. Which way will this market trend over the next several months?
2. Am I going to buy or sell this market?
3. How many units will I trade?
4. How much am I prepared to risk if I'm wrong?
5. What is my profit objective?
6. Where will I enter the market?
7. What type of order will I use?
8. Where will I place my protective stop?
Going through the checklist won't guarantee the right conclusions. It's only meant to help you ask the right questions. Asking the right questions is the surest way of finding the right answers. The keys to successful trading are knowledge, discipline, and patience. Assuming that you have the knowledge, the best way to achieve discipline and patience is doing your homework and having a plan of action. The final step is putting that plan of action to work. Even that won't guarantee success, but it will greatly increase the odds of winning in the financial markets.
HOW TO COORDINATE TECHNICAL AND
FUNDAMENTAL ANALYSIS
Despite the fact that technicians and fundamentalists are often at odds with one another, there are ways they can work together for
mutual benefit. Market analysis can be approached from either direction. While I believe that technical factors do lead the known fundamentals, I also believe that any important market move must be caused by underlying fundamental factors. Therefore, it simply makes sense for a technician to have some awareness of the fundamental condition of a market. If nothing else, the technician can inquire from his or her fundamental counterpart as to what would have to happen fundamentally to justify a significant market move identified on a price chart. In addition, seeing how the market reacts to fundamental news can be used as an excellent technical indication.
The fundamental analyst can use technical factors to confirm an analysis or as an alert that something important may be happening. The fundamentalist can consult a price chart or use a computer trend-following system as a filter to prevent him or her from assuming a position opposite an existing trend. Some unusual action on a price chart can act as an alert for the fundamental analyst and cause him or her to examine the fundamental situation a bit closer. During my years in the technical analysis department of a major brokerage firm, I often approached our fundamental department to discuss some market move that seemed imminent on the price charts. I often received responses like "that can never happen" or "no way." Very often, that same person was scrambling a couple of weeks later to find fundamental reasons to explain a sudden and "unexpected" market move. There's obviously room for much more coordination and cooperation in this area.
CHARTERED MARKET TECHNICIAN (CMT)
A lot of people use technical analysis and offer opinions on the technical condition of the various markets. But are they really qualified to do so? How would you know? After all, you wouldn't go to a doctor who didn't have a medical degree on the wall. Nor
would you consult a lawyer who hadn't passed the bar exam. Your accountant is undoubtedly a CTA. If you asked a security analyst for an assessment on a common stock, you would certainly make sure that he or she was a Chartered Financial Analyst (CFA). Why wouldn't you take the same precautions with a technical analyst?
The Market Technicians Association (MTA) resolved this question by instituting a Chartered Market Technician (CMT) program. The CMT program is a three step examination process that qualifies the analyst to carry the CMT letters after his or her name. Most professional technical analysts have gone through the program. The next time someone offers you his or her technical opinion, ask to see the CMT.
MARKET TECHNICIANS ASSOCIATION (MTA)
The Market Technicians Association (MTA) is the oldest and best known technical society in the world. It was founded in 1972 to encourage the exchange of technical ideas, educate the public and the investment community, and establish a code of ethics and professional standards among technical analysts. (On March 11, 1998 the MTA celebrated the 25th birthday of its incorporation. The event was highlighted by a special presentation at the New York monthly meeting by three of the organization's founding members—Ralph Acampora, John Brooks, and John Greeley.) MTA membership includes full-time technical analysts and other interested parties (called affiliates). Monthly meetings are held in New York (Market Technicians Association, Inc., One World Trade Center, Suite 4447, New York, NY 10048 (212) 912-0995, e-mail: shelleymta@aol.com), and an annual seminar is held each May at various locations around the country. Members have access to the MTA library and a computer bulletin board. A monthly newsletter and a periodic MTA Journal are published. Some regional chapters have even been formed. MTA members also become colleagues of the International Federation of Technical Analysts (IFTA).
THE GLOBAL REACH OF TECHNICAL ANALYSIS
During the fall of 1985, a meeting was held in Japan with technical representatives of several different countries to draft a constitution for the International Federation of Technical Analysts (IFTA, Post Office Box 1347, New York, NY 10009 USA). Since then, the organization has grown to include technical analysis organizations from more than twenty countries. One of the nice things about being a member is that annual meetings are held in places like Australia, Japan, Paris, and Rome since a different national organization hosts each seminar. I'm proud to say that in 1992 I received the first award ever given at an IFTA conference for "outstanding contribution to global technical analysis."
TECHNICAL ANALYSIS BY ANY NAME
After a century of use in this country (and 300 years in Japan), technical analysis is more popular than ever. Of course, it's not always called technical analysis. In my book, The Visual Investor, I called it visual analysis. That was simply an attempt to get people beyond the intimidating title of technical analysis and to get them to examine this valuable approach more closely. Whatever you want to call it, technical analysis is practiced under many names. A lot of financial organizations employ analysts whose job it is to number-crunch market prices to find stocks or stock groups that are expensive (overbought) or cheap (oversold). They're called quantitative analysts, but the numbers they crunch are often the same ones the technicians are crunching. The financial press has written about a "new" class of trader called "momentum" players. These traders move funds out of stocks and stock groups that are showing poor momentum and into those that are showing good momentum. They use a technique called relative strength. Of course, we recognize "momentum" and "relative strength" as technical terms.
Then there are the brokerage firms' "fundamental" upgrades and downgrades. Have you noticed how often these
"fundamental" changes take place the day after a significant "chart" breakout or breakdown? Economists, who certainly don't consider themselves technical analysts, use charts all the time to measure the direction of inflation, interest rates, and all sorts of economic indicators. And they talk about the "trend" of those charts. Even fundamental tools like the price/earnings ratio have a technical side to them. Anytime you introduce price into the equation, you're moving into the realm of technical analysis. Or when security analysts say the dividend yield of the stock market is too low, aren't they saying prices are too high? Isn't that the same thing as saying a market is overbought?
Finally, there are the academics who have reinvented technical analysis under the new name of Behavioral Finance. For years, the academics espoused the Efficient Market Hypothesis to prove that technical analysis simply didn't work. No less an authority than the Federal Reserve Board has thrown some doubt on those ideas.
FEDERAL RESERVE FINALLY APPROVES
During August of 1995, the Federal Reserve Bank of New York published a Staff Report under the title: "Head and Shoulders: Not Just a Flaky Pattern." The report was intended to examine the validity of the head and shoulders pattern in foreign exchange trading. (The first edition of this book was cited as one of the primary sources on technical analysis.) The opening sentence in the introduction reads:
Technical analysis, the prediction of price movements based on past price movements, has been shown to generate statistically significant profits despite its incompatibility with most economists' notions of "efficient markets." (Federal Reserve Bank of New York, C.L. Osler and P.H. Kevin Chang, Staff Report No. 4, August 1995.)
A more recent report, published in the fall of 1997 by the Federal Reserve Bank of St. Louis, also addresses the use of tech‑
nical analysis and the relative merits of the Efficient Market
Hypothesis. (Technical Analysis of the Futures Markets was again
cited as a primary source of information on technical analysis.) Under the paragraph titled, "Rethinking the Efficient Markets Hypothesis," the author writes:
The success of technical trading rules shown in the previous section is typical of a number of later studies showing that the simple efficient market hypothesis fails in important ways to describe how the foreign exchange market actually functions. While these results did not surprise market practitioners, they have helped persuade economists to examine features of the market ... that might explain the profitability of technical analysis. (Neely)
CONCLUSION
If imitation is the sincerest form of flattery, then market technicians should feel very flattered. Technical analysis is practiced under many different names, and often by those who may not realize they're using it. But it is being practiced. Technical analysis has also evolved. The introduction of intermarket analysis, for example, has changed the focus away from "single market" analysis to a more interdependent view of the financial markets. The idea that all global markets are linked isn't questioned much anymore either. That's why the universal language of technical analysis makes it especially useful in a world where the financial markets, here and abroad, have become so intertwined. In a world where computer technology and lightning-fast communications require quick responses, the ability to read the market's signals is more crucial than ever. And reading market signals is what technical analysis is all about. Charles Dow introduced technical analysis at the start of the twentieth century. As the twentieth century draws to a close, Mr. Dow would be proud of what he started.
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