Dana Cole

Markets Look Set Up for an Ugly Fall

To quote my own post to a very similar article on another website:

Thank you for the interesting article, but I have come to the conclusion that in connection with the stock market, which is subject to the influence of billions of people:

THERE IS NO WAY TO PREDICT WITH ANY RELIABLE ACCURACY WHAT WILL HAPPEN TOMORROW BASED ON WHAT HAPPENED IN THE PAST.

If someone can convince me otherwise, please cite the evidence. I am more than willing to be wrong.

All charts do is tell you where the market HAS BEEN and where it is NOW. Trying to predict which way it is headed based on chart patterns is like trying to predict which way a flock of birds is going to fly based on where they flew ten minutes ago.

In late January the 10-20-30 day trend lines of TMA were screaming "Buy!" For a little lesson on making a trade based on trend lines, take a look at that chart now.

(My sympathies to those who bought TMA. I have made the same mistake more than once, which is why I am posting this comment.)

In the same way, in late January the 10-20-30 day trend lines on AA spelled doom for the stock. To see what actually happened, check out the chart now.

Anticipating breaks in trend lines - even long-term trend lines - is dangerous because the time when a break appears imminent (or, in other words, as charts looked TODAY) is exactly the time when stocks have become cheapest relative to where they have been. The longer the trend line, the cheaper they are.

Does that mean that charts should not be used? Of course not! They are the only really effective visual ways we have of determining what has happened and where we are now. And to the extent that up and down patterns DO tend to repeat themselves over time, they are highly useful in GUESSING were things are going. It is still just a guess, though.

We must always remember that no stock ever obeyed the dictates of a chart. Just because I draw a line under a price does not mean that that price will not be violated - NOR does it mean that it is at risk of being violated. It is only a line on a chart and that is all.

I'm only trying to save someone some time and a little money here. In the past I would have been grateful if someone had done it for me.