Why I Believe Stock Charts Are Leading Indicators

In my last weekly report I urged you to Not Be Greedy and take the gift as the indices pushed higher into resistance levels with little conviction on expectations of another Fed rate cut. Sure, a 50bp cut may have propped up the market for a bit longer, but the bulk of the rate cute hopes were priced in already. That was your cue to take some profit and think about adding some short exposure.

As it turned out, the Fed didn't surprise anyone by hitting the homerun with a 50bp cut (maybe due to the much hotter than expected inflation readings on Thursday and Friday), but had another trick up its sleeve, which proved to temporarily save the day and inject more liquidity, but more importantly a bit more confidence that the Fed will do anything to save the mortgage industry. However, confidence doesn't last long and more liquidity doesn't always work, so this market still finds itself mired in a state of uncertainty both fundamentally and technically.

I'm not an economist and prefer not to spend precious hours debating inflation, recession or if the Fed is doing the right thing. Those are all LAGGING indicators anyway. Remember, LOOOOONNNGGGGG before those calling for a recession are proven right, the stock market will have already tanked and WE will have already bagged big profits on the short side and looking to get long again.

With that said, I turn to the ONLY leading indicators available. The charts. What are they telling us? Generally, they tell us what the big fellas are doing. The Banks, the Pension Funds, the Mutual Funds and increasingly so, the Hedge Funds. Actions speak louder than words and the big fellas reveal their actions in the price and volume movements.

Unfortunately, there are times when the charts indicate more uncertainty. Just a few days ago, there was much more certainty that the market would drop. It was oversold and buy volume was diminishing as overhead resistance loomed. Now that we have pulled back some, I've become a bit more neutral but still giving the bears the upper hand. The onus is still on the bulls now.

Comments

[PJ568]

Reflective, yes: predictive, no. They lead only in the fact they are updated daily. By the way what type of charts, timeframes and analysis methods are we discussing? My opinion pertains to all of them. Don't get me wrong, I love charts but we should recognize their strengths and their limitations. They don't tell the future better than any other system or person. Easy test, take a chart and predict the the next week, month, quarter and year. File it away and compare to actual. How accurate was that?

[Tate]

Of course charts aren't going to be 100% accurate and getting in at the exact bottom or exact top isn't going to happen. However, they do indicate the strength/weakness of any market. The charts alone predicted the coming sell off in Oct/Nov based on selling intensity and resistance levels alone. I was pounding the pavement on this for several weeks. As for what time frames or methods, the analysis works on all time frames and for the record I keep it simple and just base my analysis on price/volume & support/resistance. I don't think it needs to get more complicated than that. Seeking Alpha didn't include my chart analysis in the article for some reason. It's over at selfinvestors.com/trad.../ if interested.

[PJ568]

I think our diffference lies only in the semantics of what a leading indicator is. To me "leading indicators" are root causes giving rise to certain effects (i.e, employment, inflation, interest rates, etc.). I believe charts fully reflect past events and indicate market psychology in a very simple and effective manner. So they indicate directional momentum and a likelihood of that continuing but are unrelated to the cause of tomorrows (future) events.