One of the reasons I think many people who do not use technical analysis are really leaving a big part of their tool belt unused is information leaks on Wall Street. Like it or not, people in the know (a.k.a. "smart money") generally have an information advantage. Where it crosses the line to insider trading is the gray area ... but let's be honest, every day in the options market, big outsized bets are made and this type of money is not thrown around on 50/50 coin flips.
You do this long enough and you see those spikes in volume (in stock or call options) hours before a merger is announced, or vice-versa, ahead of bad news -- and the truth is pretty apparent. One could argue an entire SEC department should be investigating big option market bets (or stock volume surges ahead of news) to see why people are "so confident" in laying down so much money on a future event -- but let's not turn into dreamers.
Even along more innocent lines, if you happen to be an investment bank that has hundreds of former employees working inside of the government, you have a massive information advantage over the masses in terms of legislation and future effects on companies. Gordon Gekko said it best:
The most valuable commodity I know of is information.
So as a small-time institutional or retail investor (or one not working inside one of our oligarchs/"smart money"), you are at a disadvantage. But this is where I believe technical analysis helps even the playing field.
If you see a weak chart in a rampaging bull market, you need to be questioning things. Often. Does it always play out that bad chart = bad news event? No ... but the market is all about probabilities. If you can turn a speculation from 50/50 to 72/28, that's obviously a huge advantage.
I bring this up today because of momo favorite Akamai Technologies (AKAM). This is the type of market that has run up almost everything, but especially the "high growth" momo names. But look at the chart of AKAM:
[Click to enlarge]
Warning signs all over the place. In a normal market, anything trading below the 50-day moving average would send a yellow flag up, but in a market as historically strong as this one -- up eight out of every 10 days -- a stock trading even below the 20-day has to have you wondering.
Akamai was not only below the 20-day but also below the 50-day -- and not just for a few days, but for almost all of December and January (and February, MTD). If you never looked at a chart or practiced technical analysis, you'd just have been frustrated by a sideways stock in a market that melts up continuously. But by adding a very simple technical framework, you would at worst have been extremely cautious going into this earnings report (reducing your position) or, preferably, avoided it entirely.
Again, is this approach foolproof? No. Sometimes a stock will surge on earnings despite a bad chart. (or vice-versa) But more often than not, the "smart money" has already figured things out (by whatever method), and your only clue to that is the way the stock is acting (i.e. the chart).
- Shares of Akamai Technologies Inc. plunged Thursday after a weak forecast for the current quarter and as competition from other vendors forces the company to renew contracts at lower prices.
- Though the company topped Wall Street analysts with its fourth-quarter earnings report late Wednesday, it also said it expects first-quarter revenue of $265 million to $275 million, short of the $284 million analysts had predicted.
- Oppenheimer analyst Timothy Horan, who rates the company as "Perform," noted that Akamai's business has become more cyclical, with the first quarter being a traditionally weaker period. He added that Akamai's customers likely bargained for volume discounts and mentioned competitors such as Level 3 Communications Inc. (LVLT) to negotiate lower prices.
- In general, he said, those pricing pressures should cause stocks across the web-management sector to fall. "We believe that shares will remain pressured for a few months given their very strong run and relatively high historical valuation," Horan wrote. Horan lowered his 2011 earnings forecast to $1.59 per share from $1.62.
Disclosure: No position