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 Life Technical Analysis

Models and technical analysis cannot always spot each change in market conditions. Independent thinking, emotional stability, a keen understanding of both human and institutional behavior is vital for long term investment success.

 Definitions:

  • Point-and-Figure (PAF) charts probably produce the most boring commentary for non-familiar readers to digest. Even though they are not as exciting as momentum charts which can tell you almost anything you want to hear, the advantage of point-and-figure analyses is that it is the most objective type of technical analysis. One would be well served to consider that more often than not, intermediate term investments that go against the PAF analysis lose money. These charts send out “buy” or “sell” signals and there is no room for subjectivity. Although they are objective, as with any other technical analysis method, they can be late or produce whipsaws. It is at times such as this when PAF charts are the most useful because they are clear, objective, and unemotional. (While today’s markets are totally emotional.)

  • One of the characteristics of a Point & Figure chart, is that  it shows accumulation and distribution patterns. The larger the distribution pattern, the bigger the subsequent potential move.

    There are different ways to calculate objectives. One is to measure the MAL (maximum activity line) and multiply it by 2 or 3. This calculated distance is then set out on top or below the MAL line.

     

  • A Bear Trap:  a false signal that the rising trend of a stock or index has reversed when it has not.

  • A Bull Trap: a false signal indicating that a declining trend in a stock or index has reversed and is heading upwards when, in fact, the security will continue to decline.

  • Dead Cat Bounce: a temporary recovery from a prolonged decline or bear market, after which the market continues to fall.

  • Technical Correction: a decrease in the market price of an asset or entire market after extensive price increases. A technical correction occurs even when there is no evidence that the increasing price trend should cease.

  • A slingshot reversal is a reliable trading pattern and is defined as a false breakout + reversal and occurs when a major support or resistance point is broken but the price does not hold below support or above resistance and moves back into it's previous trading range.

  • Shaven Head: applies to candle charts. A bullish pattern during a downtrend & a bearish pattern during an uptrend.

  • Cup and Handle and/or Multiple cup and Handle. A strong reversal signal.

  • RSI (Relative Strength Indicator) and (full) Stochastics can be excellent trend reversal spotters. However, one must take into account that the RSI or Relative Strength Index must be interpreted in a different way depending upon the cycle. In other words, in a SECULAR BULL market, the RSI will seldom break below the 50 level. In a SECULAR BEAR MARKET, the RSI will seldom break above the 50 level. In other words, a RSI below the 50 level in a Bull Market is a Buy signal and a RSI above the 50 level in a Bear Market is a Sell signal. Stochastics show similar characteristics.
  • The Moving Average Convergence/Divergence (MACD) is one of the simplest and most reliable indicators available. MACD uses moving averages, which are lagging indicators, to include some trend-following characteristics. These lagging indicators are turned into a momentum oscillator by subtracting the longer moving average from the shorter moving average. MACD centerline crossovers occur when the faster moving average crosses the slower moving average and hereby generate a sell or a buy signal.
  • Divergences between the price evolution and the RSI, Slow and Fast Stochastics are also important additional indicators. There are POSITIVE and NEGATIVE divergences.
  • French Curves like Gold. A French curve is a mathematical formula that works rather well on Gold and currencies. It acts as a long term support line and at the same time it shows the (potential) parabolic acceleration.  A penetration of the French curve would light up a caution sign.
  • Falling wedges are more reliable technical patterns. The price tends to break out of the wedge once 2/3rds of the wedge has been built.
  • Head and Shoulder patterns can sometimes be tricky. They can fail. However, when the pattern is correct, the price objective is measured as the distance between the top and the neck line.