One of the BloggingStocks editors recently instant messaged me and said, "You know, I think technical analysis is bull." I've heard this opinion very frequently, and I've even held this opinion in the past. But from watching stocks for several years I've seen certain price moves that seem to occur again and again. Sure enough, these movements are some of the most fundamental elements of technical analysis; for example, support, resistance, uptrend, etc. I've seen many people who don't know any technical analysis but reference a stock's breakout on its "graph" -- just from watching stocks trade, they have realized this is often a sign of future profits to come.
As I began studying technical analysis more frequently, I learned more about the skill -- moving averages, indicators, oscillators, and so on. Many of these tools, in my opinion, do in fact have predictive value in the stock market. More importantly, these tools allow traders to more effectively and systematically (therefore, less emotionally) manage their money.
All this being said, I think the editor was right in one regard -- I have a lot of trouble believing in patterns (e.g., "Head and Shoulders") because I think that many of these are way too objective when it comes to trading. I also find that they are harder to explain than many other tenets of technical analysis, such as support and resistance.
I've been on all sides of the technical analysis argument -- extraordinarily against, emotionally for, and everything in between. As it stands now, I feel like it's just another tool in the toolbox for a trader and there's no reason not to consider it.
Considering all this, let's look at Amazon's (NASDAQ: AMZN) chart. As I've covered in several recent posts, I believed Amazon would sell-off after it's stellar earnings report.
Looking at the chart now, I think the stock is attractive for a longer term trade. There are several reasons for this belief.
First, the stock's sell-off in the last week was a relatively light volume sell-off. While this may not seem important, I consider it to be pretty significant because it implies that the recent sell-off was just the result of buyer activity drying-up, rather than significant institutional distribution.
Secondly, I think the stock is sitting at an important support level, which it seems to be holding. The green line of the chart represents this support line. I consider it to be support because it served as an important resistance level twice in the past. More importantly, the stock has held this level in the last three trading sessions.This is a positive because it means there wasn't significant institutional distribution. Instead, the stock probably sold off simply because buying enthusiasm subsided for the time being.
Also, a stop is easy to place on this trade -- simply a point or two below the support line, because if the stock holds below the line the thesis is nullified.
Lastly, the stock's pullback made perfect sense -- which is why I was able to predict it. The cause was simply shorts no longer covering their positions and interested buyers waiting for a pullback to become involved. Well, the pullback has arrived, and I think buyers are going to start getting interested. This is an important level for all different types of traders -- those who follow moving averages (stock is at 20-day moving average), those who trade on support/resistance levels (stock is sitting at support), and those who look for breakouts that have come back to a base to begin another leg-up.
Add it all up and, to Georges Yared's pleasure, it's time to buy Amazon.
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