February 13th, 2007
The principal Technical Stock Analysis tool is a stock chart. Rather than comparing the current price to some theoretical value derived from “informed” guesstimates of earnings projections, growth rates, future interest rates and industry comparisons, stock selections using charts is essentially an attempt to piggy-back and mimic the analysis and decision making of large investors as reflected in the effect on the impact on share prices from their trading volume.
Large investors employ strategies when they either make their large commitments or dispose of their large positions. In poker it’s called a “tell”. In the stock market, even though they attempt to camouflage their actions (by such tactics as spread their trades over an extended period, spreading the trades through various trading houses, varying the prices their willing to pay or accept for shares), the decisions of large traders is often observed through patterns made by the price and volume in stock charts.
Their trading decisions leave a wake in either the absorption of all readily available shares or conversely increase the supply of shares. The “tell” in stock charts are the pivot points where stocks reverse direction. Once the demand or supply is fully absorbed, stocks “breakthrough” and their momentum tends to carry them to new levels where supply and demand come into balance and form a consolidation pattern.
Following through on yesterday’s posting, take a look at IBM’s long-term (1998-present) chart:
Clearly evident on this chart is the long consolidation channel formed from IBM’s all-time high just before the internet bubble burst. I’ve superimposed a few of the brokerage house (JP Morgan, CS/First Boston and AG Edwards) upgrades and downgrades during 2004-2007. None of these calls (which, by definition are recommendations to buy or sell) were made at any critical points on the chart. I’m not sure what the firms saw in their projections that would have caused them to change their opinions but I’m also sure they gave reasons that appeared reasonable (but I believe immaterial) at the time and made for a good story and good reading.
Over the period, IBM sold their PC business, continued their migration out of computing hardware and into services, sometimes beat expectations and sometimes fell short, increased dividends, launched or expanded share repurchase programs …..
Regardless, as an individual shareholder, the only thing that should matter to me (since I don’t have the time or resources to conduct in-depth analysis on more than a handful of companies, even if I wanted to) is whether more big money is flowing into the stock than out. And the chart indicates that this has not been the case since 1999.
What is important from my perspective as a chartist, however, is that IBM’s downward sloping channel has morphed since 2005 into a horizontal channel, the upper resistance trendline of which is converging with the upper resistance trendline of the mega downward sloping channel. A significant, long-term trading opportunity may appear over the next several quarters as the price approaches and attempts to breakthrough those converging lines.
I’m not sure the what forces and events will cause the price to penetrate in a significant way those lines but I’m sure there will be many brokerage house reports offering, after the fact, their explanation of company events, industry factors, domestic and international financial forces that caused that to happen. It makes for entertaining and informative history but nothing that might be useful for making a decision today.
As a cautionary note, the conditions for breakthrough may not be propitious and the stock will, again, retreat from these upper resistance trendlines and test lower support and that is why we wait for clear, high volume breakouts.
to be continued ……