As I talked about on yesterday’s post, we have been in danger of falling below the November lows for a couple of days. Today the Dow Jones did just that. With that in mind, let’s take a quick look at technical analysis and what today’s events may or may not mean.
Just like most things on Wall Street these days, much of it is a matter of opinion and/or emotion. When you hear analysts talking about “The November Lows” they are talking about the lowest numerical level that the major stock indices have closed at since the recent economic downturn.
I need to explain to you the two types of investors in order for you to understand how this works. First, there are fundamental analysts. Rather than studying charts and graphs, fundamental analysts look at the more real world factors that make up a company. For example, fundamental analysts would say, “Because everybody needs their medicine no matter what shape the economy is in, companies that manufacture health care items will most likely not be as affected by the recession as luxury item companies.” The drawback to this form of analysis is that some emotion can be involved which is sometimes an enemy to good disciplined investing.
Technical analysts look at charts and analyze the purely numerical and statistical trends of a stock’s movement. They identify patterns in the data and postulate (speculate) movements based on these patterns. Technical analysts set very specific buy and sell points and often will initiate buys or sells based on these preset levels regardless of what the news surrounding the movement may be.
Of course many investors are a combination of both often considering all of the data. I tend to be a fundamental analyst using the charts to identify trading ranges.
When we hear news like today, this is largely a technical piece of news. Technical analysts believe that when the market breaks through the lowest point in a trading range, it is poised to go even lower because the technical analysts often have heavy sell orders at the lowest point of the range. The fundamental analysts share this belief because they think that big investors will get scared when the market breaks its lows and will sell off because of it. In other words, bad news for all investors.
Here is my personal opinion. I believe that the market may not take a big dive because of this. First, it didn’t severely break though. It actually rebounded today. This may indicate that much of the market may have already sold off and doesn’t have a lot lower to go. Next, unlike the November lows, there is very little bad news left to digest. We all know that the economy is terrible and there is very little optimism and when there is such a low level of optimism, much money is already on the sidelines. The only case for a big stock market dive is that there is nothing left in the pipeline from the government so the old rule of “buy the rumor” isn’t applicable. There is nothing at this time to look forward to.
Let’s wait and see. Keep your money on the sidelines for a little while and then buy at these lows.