Technical Analysis Plain and Simple: Charting the Markets in Your Language

by Michael Kahn CMT

Overview

“This book is an excellent primer. As a proponent of the art-versus-science school of technical analysis, his primary focus is on the practical aspects of chart reading and how to translate the intelligence derived from charts into investment decisions. If you have ever wondered what technical analysis is, or how you could get started doing it, this is a good place to start.”

John Bollinger, CFA, CMT, President, Bollinger Capital Management

 

“Here is the place to discover why the RSI goes up while the price is going down, how to measure potential moves from a breakout, how not to look at a chart with preconceived notions of what the market will do--‘Let the market talk....’ The advice is above all practical. [This is] a book to own, particularly in the earlier stages of your investment career.”

Michael Smyrk, STA Journal

 

“Finally, an easy-to-understand explanation of how technical analysis works! This primer shows investors how to spot trends and patterns in the markets that can help them choose winning stocks. Full of practical advice, this is a must have for both individual and professional investors.”

Susie Gharib, Coanchor, PBS Nightly Business Report

 

The Best-Selling Introduction to Technical Analysis: Updated with New Examples, Techniques, and Guidance!

• Fully updated with new coverage of bubbles, sector rotation, and rare “black swan” market events

Technical analysis offers powerful, objective tools for picking stocks and making money--and in today’s market environment, that makes it more indispensable than ever. Unfortunately, most technical analysis books confuse investors instead of enlightening them. In this clear, practical, fully updated book, Barron’s Online technical analysis columnist Michael N. Kahn introduces proven technical analysis techniques in simple language that any investor can understand and use.

 

Kahn explains how technical analysis works and then teaches you how to read charts and translate them into investment decisions. You’ll learn how to use technical analysis to complement your current approach to stock selection, discover what makes a stock look promising, and objectively assess both risk and reward.

 

This completely revised third edition contains many new examples reflecting today’s transformed market environment. You’ll find detailed new coverage of recognizing bubbles, including real estate (2006), oil (2008), and bonds (2009). Kahn presents powerful new insights into the relationship between technical analysis and market psychology and crucial, up-to-date guidance on sector rotation in rapidly changing markets. He also presents a full chapter on navigating through chaotic, once-in-a-millennium, “black-swan” market events.

 

• Why technical analysis works
  Bringing real objectivity to investment decision-making
• Chart patterns: See the forest and the trees
  Recognizing markets that are changing, need a rest, or are about to take off
• Understand the central importance of price...
  And what you must know about volume, time, and investor sentiment
• Down the road: a taste of advanced technical analysis
  Candlesticks, cycles, Elliott waves, and how to debunk those guys on TV

Product Details

ISBN-13:	9780137057085
Publisher:	Pearson Education
Publication date:	10/20/2009
Sold by:	Barnes & Noble
Format:	eBook
Pages:	352
File size:	7 MB
Age Range:	18 Years

About the Author

Michael N. Kahn, CMT, a Chartered Market Technician, currently writes the twice-weekly column “Getting Technical” for Barron’s Online. Mr. Kahn also produces a daily proprietary technical market newsletter, Quick Takes Pro (www.QuickTakesPro.com). Previously, he was chief technical analyst for BridgeNews, a division of Bridge Information Systems, a leading source of global financial information, transaction services, and network services.

 

He has been a regular guest on the Nightly Business Report on PBS, has appeared on CNBC, and was the editor of the Market Technicians Association newsletter, Technically Speaking. His first book, Real World Technical Analysis, was published in January 1998, by Bridge/Commodity Research Bureau Publishing.

 

Prior to writing technical commentary, Mr. Kahn was a Senior Product Manager for Knight-Ridder Financial before that company was merged into Bridge. He was responsible for the marketing design of several of the firm’s charting software platforms and launched technical analysis coverage for Knight-Ridder Financial News. He was also a coeditor of the Tradecenter Market Letter. Prior to joining Bridge/Knight-Ridder Financial in 1986, Mr. Kahn was a senior municipal bond specialist with Merrill Lynch. He also worked in the Financial Planning Department at Shearson Lehman American Express.

 

Mr. Kahn holds a Bachelor of Arts degree in physics and economics from Brandeis University and a Master of Business Administration from New York University.

Read an Excerpt

PrefacePreface

Technical analysis is one of the oldest market disciplines, yet the majority of the investment and academic communities consider it, at best, a minor supplement to their own work. At worst, it is disparaged as tea-leaf reading or simply a self-fulfilling prophecy. Look at these two phrases. They suggest that the technical analyst divines the market from some mystical process. This could not be further from the truth.

Consider the fundamental analyst. This person relies on company reports, conversations with company insiders, and macro-economic research in relevant business sectors. All of this is indispensable when determining if a company is viable and predicting how its business will fare in the future.

Now consider the source of all the raw data. Much of it is projection and conjecture. How can you rely solely on such raw data when earnings reports and other industry-wide data will be subject to revisions?

Technical analysis looks at actual trades where bulls and bears have put their money where their collective mouths are. There is no revision of data. There is no ambiguity. There is no mystical divining of the future. All market and stock selection is based on current, not past, price performance, the predictable behavior of market participants, and the dynamics between markets over time.

Trends exist. Information is slowly disseminated to the public in an imperfect manner, and as the public acts on the information, the markets move. They continue to move until either the last group has acted or an outside influence, such as news, ends the trend. Sounds a lot like physics, does it not? A body in motion tends to remain in motion.

Look at another aspect of the analysis. Behavior is a key component of the analysis. When similar market conditions occur, market participants react in similar ways. This is how the patterns and measurements within technical analysis are created.

For example, the market holds fairly steady as buyers and sellers adjust their portfolios to meet their specific investment criteria. A stock might trade from 50 to 52 for weeks in this way. Is the stock good? Is the company good? You do not know. All you know is that bulls and bears consider the stock to be fairly valued within a small range. A body at rest tends to stay at rest—physics again.

Now, somebody comes into the market to buy a large block of stock. Why? Technical analysis does not know but more importantly, it does not care. All it needs to know is that money has flowed into the market and increased demand for the stock. Demand? That is straight from basic economics. If demand rises, the price must rise to induce sufficient supply (sellers) to come into the market and restore equilibrium. This does not sound very mystical, does it?

So, now that demand has increased, market activity picks up to provide supply. It also changes in character as people try to decipher what is happening. Here are the familiar concepts of fear and greed, both key determinants of human behavior. Some participants will think that something has changed and that the stock is now undervalued. It could be a new product or simply a decrease in the company's raw material inputs. Perhaps it is foreign capital coming into the stock. Or a shortage of stock itself. Whatever the reason, some market participants know something, or think they know something, about improved prospects for the company and they buy. The market breaks out of the trading range and as it does, more market participants act. The size and scope of their actions is most often similar to the size and scope of their actions at other occasions when the market has broken out of similar ranges. It can be measured and projected.

Technical analysis has an unfortunate name. Perhaps "price action analysis" or "supply, demand, and reaction analysis" might be better. In 1998, great strides were made between market technicians and the academic community in the emerging field of behavioral finance. Now there is a possible name to use.

One aspect of the technical discipline is explaining the difference between valuations and actual market prices. If a stock is worth 75 on paper based on discounted cash flows, projected growth, and overall economic conditions, why is it trading at 90? The difference is in the market's perceptions of the stock. People have pushed the stock up past its theoretical value, and technical analysis is perfectly suited to handle this. Because people's perceptions can change quickly, it is also perfectly suited to reacting equally as quickly. This type of reaction speed is impossible using fundamental analysis alone.

So do you scrap your fundamentals and rely exclusively on technicals? Absolutely not! Although there are scores of money managers and traders that are 100% technical and making a lot of money, you, the reader, are not interested in making technical analysis your sole investment discipline just yet. You are reading this book because you are seriously interested in enhancing your returns, not searching for a completely new method. Perhaps one day you will make that switch, but that is beyond the scope of this book.

At this stage, charts will give you a clear picture of what your fundamental research is saying. Remember that fundamentals describe the company. Technicals describe how the stock is performing. You are buying stock, not companies.

© Copyright Pearson Education. All rights reserved.

Table of Contents

Preface     xxi

About This Book     xxv

How to Get the Most from This Book     xxxi

Part I A Few Things You’ll Need to Know Before You Begin

1 Required Background     3

2 What Is Technical Analysis?     13

3 What Is a Chart?     19

4 Jargon You Cannot Avoid     25

Part II The Core of Chart Analysis

5 Concepts     35

6 What Are Supply and Demand in the Markets?     41

7 The Trend Is Your Friend and So Are Trendlines     47

8 See the Forest and the Trees     55

9 Chart Patterns--When the Market Needs a Rest     63

10 Chart Patterns--When the Market Is Changing Its Mind     73

11 Chart Patterns--Explosions     83

12 Corrections in Perspective     89

Part III Technical Analysis in the Real World

13 What Is There Other Than Price?     97

14 Volume     109

15 Time     117

16 Sentiment     121

17 Fundamental Analysis Really Is Technical Analysis     131

18 Just What Makes a Stock (Bond, Commodity) Look Good?     137

19 Risk Versus Reward--Is This Stock Really Worth It?     149

20 This Isn’t Brain Surgery     161

Part IV The Actual Process of Investing

21 OK, Now Do It!     177

22 How to Know if You Are Wrong     183

23 Sometimes Being Wrong Is Good     187

24 When to Sell     191

25 Bear Markets     203

26 A Word About Your Ego     209

Part V Tools and Case Studies 

27 What Do I Really Need to Get Started?     213

28 Building Your Technical Toolbox     219

29 Final Advice     225

30 Case Study--The Perfect World     227

31 Case Study--The Real World     235

32 Case Study--Bizarro World     249

33 How Good Is Your Broker’s Stock?     253

Part VI Further on Down the Road

34 Introduction to Candlesticks     261

35 Cycles     271

36 Elliott Waves     275

37 Technical Terms You May Have Heard     279

38 Debunking the TV Analyst     299

Fun with Jargon      303

Closing Thoughts     311

Index     313