In last week’s blog we talked about when bears attack and what we need to do when that happens. We talked about looking at levels of support and resistance and being observers of the market as opposed to being prediction machines. As I spoke about this wisdom came from one of my mentors, he was full of lots of trading wisdom and I tried to soak up as much of that wisdom as possible. This week I am going to share a little more of the wisdom I was blessed to learn. This week I want to talk about the team approach to technical analysis. I want to talk about this because it is always better to tackle something with a great team as opposed to trying to go it alone.
On this team we have several members and each member adds a little something to bring about the best results we can possibly hope for. The first member of the team is the levels of support and resistance we talked about last week. We need to think of this as our superstar of the team. This is the first thing we look to and it is the thing we must give the most attention and weight to. Think of this as giving the most ice time to the best player on your hockey team, the Wayne Gretzky, if you will. In times of both trouble and really anytime you are doing your technical analysis this should be your primary focus and your first course of action is identifying these levels.
This brings us to the next player on the team. This player is also important and deserves some serious ice time or attention as the case may be. This team member is the moving average. This player can pick up the slack if your superstar player isn’t clicking or if your all star needs an assist as well. If you look at the recent price action in the market you will see that some levels of support have failed but the 50-day moving average has up till now held strong. Take a look at the chart below and you will see what I mean. You will see that the blue line, the 50-day moving average has held and the price has bounced each time it has gone down to that level with these last two pullbacks. You can see that this team member can be very important on its own and also can add to the overall strength of the team.
The next team member is really a collection of players. These players can help by filling in the other positions on the ice and making what we in the sports world call a “set piece.” A set piece for those who do not partake in sports is essentially a play that is drawn up before the game begins and is used when it becomes necessary. In hockey, this would be considered a specific setup for the power play or a penalty kill. In trading, this would be called slowing momentum and it would be seen in a specific way. We would see this when a number of candles have a specific size and shape to give us an indication that things might be changing in the market landscape. If we have a series of candles that are getting smaller and smaller then this “set piece” can help identify areas of change.
The final team members are the ones that come off the bench to give you additional support in the game. These team members can round out the picture and give a full view of when things might be changing. These players are your favorite indicators. Indicators that give clues about overbought and oversold conditions like the RSI or the Bollinger Bands can be effective when added to all the other metrics that have been mentioned here.
So if we think about our team approach here, we have our superstar which are our levels of support and resistance, and then we have our moving averages which is a nice addition to the work of the superstar. We then bring in the support team of slowing momentum and our indicators and when we put this team all together we can have a good view of how things are working out in the markets. This can ultimately give us a clue as to what may occur in the near future of the market but we need to remember we are not trying to predict what is happening but observing what happens after the market moves to a certain point or level and then reacting to that situation.
I think it should be fairly easy to see that the team approach is always much better than just using an individual approach so make sure you have all your team members in place and then it should be much easier to build a technical picture which in turn should make your trading easier.
Trade Well,
Coach “Old Money” Holmes
