Understanding technical analysis is an art form that is certainly shaped most by experience. As a charting veteran, I have evaluated thousands of charts, a daily ritual that exceeds well over 100 in a day. That may seem exhausting but it is my requirement to perfect my craft and find the next winning trade - nobody will just hand it over to me, I have to work for it.
My last class at San Diego State in 1990 was called 'Portfolio Management', where I had a brilliant instructor talked about different tools and models. He dedicated two of the twenty five session to discussing technical analysis, prefacing his first talk by saying it was useless, nobody used it and it was certainly going to fade away. Being a contrarian, at that point I needed to learn more about technical analysis.
I used to find pleasure in analyzing the financials but would find myself beating my head against the wall trying to understand valuations. It made little sense for a company to have such a rich valuation - undeserved. I recall a time back in the late 90's when Brocade Communications was selling at 100x sales at its peak price. From a fundamental perspective that was just absurd.
Forget about the price/earnings ratio, which was probably something like 300 or more. Think a moment - it would take 100 years for this company to grow into this valuation. Contrast that with Apple today, which currently sells at just under 4x sales.
What startled me at the time was this stock kept going up and up to reach that out of sight valuation. Before BRCD and other stocks started their meteoric rise they were already overvalued on a fundamental basis! There was nothing stopping this stock (and others) as it moved to higher ground. Sure it was ridiculous, but that didn't matter (eventually it would, as we all know). I found that trading/investing from the dark side was not so bad! The charts and technicals defined the price action, and if more buyers piled in that made the charts look all the better, and sometimes a price objective became a self-fulfilling prophecy.
Charts and technicals give us a good read on investor/trader sentiment. We need to understand where the money is flowing, why it's moving and how to capitalize on it. While the fundamentals may help explain the long term trajectory of a company, it is a good chart read that ultimately helps the best with timing an entry or an exit. If we follow the big money then we at least have a guide
Bob Lang, Senior Market Strategist and trades various option trading newsletter Explosive Options. Check out the updated site.