Is technical analysis still applicable in a "news driven" market like the one we're in now?
Why or why not? Please explain. Give examples.
Best Answer
4087 points
EthanR answered 2 years ago …
Technical analysis works in any market. In the past two weeks, we have seen a change in the market in which bad news has little to no effect upon stocks. And why is that? Because the market was so technically oversold, that the market was ready to rally on any good news (e.g. google), and ready to minimize the bad news (e.g. another dismal housing report), and still go up. So the market wasn't really "news driven" as much as it was technically driven.
Let's go back a few weeks ago. The DOW was around 11,800. At that time, the RSI was at 30, and the stochastics was below 20. The MACD was about to cross over the signal line, and approaching the zero line. The market was ready to rally, and the news didn't really matter. With the amount of bad news we have had in the past two weeks, if technical analysis didn't matter, then everyone could have made a ton of money selling short. But that didn't happen.
Now we are a few weeks later, and those same indicators look like this: RSI is now at 62, stochastics is at 85, and the MACD is still in positive territory and above the signal line. Conclusion: We are still in bullish mode, however the downside risk is beginning to pick up. In other words, the rally is getting a little long in the technical tooth. So it is conceivable that in the near future, the market may no longer rally, but actually decline on bad news.
Here is my question: Why does the investment world love to bash technical analysis so much? When was the last time you saw an article saying that PE ratios, PEG, and Return on Equity don't matter anymore? Can't we just all get along?
Answers
260 points
Hillcat88 answered 2 years ago …
For a technical analyst, news themselve are neutral. We definitely have seen the different reactions of the market when the news of the big write-downs by banks came out.
They would not alter the trend of the market in a sense but they would certainly provide the necessary trigger if the technical trend requires it (such as whether it is going to drop below a support of burst out from resistance).
265 points
MaverickInvestor answered 2 years ago …
Ethan gives a great answer, to which I would add only this...
Technical trading techniques do not switch on and off depending on what's in the news, what day of the week it is, the phase of the moon or the colour of the weatherman's tie.
The charts and the indicators tell us what they tell us, regardless of whatever else is going on.
249 points
engcomp answered 2 years ago …
I like Ethan's answer and marked it as "great". It explains why the market irrationally rallied on a heap of bad news. Technical analysis tells you the true state of the collective mind. According to Ethan, that state is swinging back to bearish.
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105 points
notabusa answered 2 years ago …
Technical analysis to me is not so much about whether it works or not or under what circumstances. It is useful only in developing my trading plan. None of us can be truely sure of a stocks direction. We simply assume it's movement based on what we feel is support or resistance. If it fails support then we know we were wrong and get out. Archer Daniels (ADM) looked to be consolodating price around $47 since a strong move up in December. It seemed to be using the 50% and then the 61.8% on a Fibonacci drawn from the December high to the start of the move back in August. The breakout last week and retest is my entry with a target of the 138% or around $53. The $46 level seems significant so that is my stop. The way I see it this is a clearly defined trading plan and I don't need to get emotional about my buy sell decisions.
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