Why technical analysis and what it says about S&P500 and Dow Transports right now

Why do we focus so much on technical analysis here? Well, there are two answers to that. Here's part one of the answer: Because I got tired of losing money "investing" with fundamentals and looked for something better!! You know what I mean, right? All those times that analysts recommend stocks, especially when the consensus is that some stock will do well ... then maybe it does, maybe it doesn't ... and even if it does well, they never tell you when to sell to lock in profits, and not see them waste away!

Here's part two of the answer, why technical analysis: Because it works. Because the price of any asset is set by supply and demand (something that economists and fundamental analysts are amazingly reluctant to admit when it comes to most tradable securities), and it turns out that technical analysis gives you a way to see where supply and demand are going and therefore where price is heading. When price is trending up, or down, or consolidating, or ripe for a nice trend reversal. Discussions about fundamentals don't make money. Being able to "have tomorrow's newspaper today" through the clues of technical analysis does make money ... so that's what Unbiased Trading is about.

Trading is not really different from investing, either. Show me someone who wants to invest and doesn't care about making money, and I'll show you the tooth fairy. There's no point in putting money into anything without some protection against losing it, and without some game plan for making, taking and keeping the profits. (This is why I crack up when I hear "investment advisors" talk about assessing a client's goals - what can the goals possibly be, other than to make money?!?)

Stock prices are set by the next bargains between buyers and sellers, not "set" by analysts who calculate discounted cash flows, expected future growth, the company's balance sheet, and all that. It's certainly valid and valuable for people to know and review all that information, and it certainly helps many with their motives for buying and selling. Then again, there are also other motives for buying or selling any asset, which may have little or nothing to do with the economic fundamentals. If you enjoy discussing why transports should be going up because the price of oil is way down, or why transports should be going down because business travel is down and commodity shipments have slowed - that's all fine, well and good.

But if you want to make money (or avoid losing it!) based on where the transports are headed next, then don't buy (or sell) based on some economic ideas and a bit of hope (or fear). Use any techniques you find reliable to clue you in. That's why I use a number of techniques, usually one or a few will give some insight when others are less scrutable. The other thing is keeping an open, objective mind. It is critical - the ability to acknowledge what charts are saying, without preconception or bias. Along with the ability to check one's ego and acknowledge what's working or what isn't.

The core of most technical indicators is price + volume, with many giving ways to "see" into whether it's the buying or selling that's taking the upper hand. That's why I like to use them with Elliott Wave. Elliott Wave offers a number of alternative counts at any given point in time, so picking the "right count" is greatly helped by the indicators. For examples of ways to blend Elliott Wave counts with indicators, here are some of my thoughts marked on the S&P500 charts (below). Now, do I look at other information on the markets? Sure! Much of that gets folded in here from time to time, such as the sentiment indicators, cycles and so on. I do also factor in fundamentals, although I don't often bring that discussion here. There are plenty of other great sources for fundamental analysis (including Minyanville, Seeking Alpha, and many others.) These charts (below) use many of the indicators I like, but as you know if you've been reading here, there's also great information we factor in here such as sentiment indicators.

First, a quick look at the transports. The potential Elliott Wave count with a triangle jumps off the page of this chart, although I haven't spent as much time looking at its big picture (as with the DJIA and S&P500) so right now it's a bit more hypothetical. What does make it look fitting, though, is the way the drop from what I marked as the "e" wave has been a nice smooth trend, just the type of quick thrust move out of a triangle that's textbook Elliott Wave. The standard triangle target would be ~2600 on the transport chart.

That bearish view of the transports tends to bolster the thoughts I've been working with on the broad equities indices. I posted some days ago my thoughts on the possibilities that the financials completed their low and may pull back while the broader markets push lower - and as the financials did pull back today, am keeping an eye on that of course (will continue posting on that as we move forward).

Here are the hourly and daily bars charts of the S&P500, with plenty of my technical analysis thoughts marked on them for all interested.



As you can see (and know if you've been reading here a while), I've been tilting for days and actually a few weeks to the idea that we'd see a drop down from early January. With a pullback rally up, to be followed by another, deeper move down testing the November 2008 lows. We're finally at a point where we may be starting that next move down.

And as part of my classic Elliott Wave training, I'll note that this construct will be wrong - and discarded - tentatively if price moves above Wednesday's high, and definitely if price moves above the January 6 high. It isn't that I lack confidence in what I see in the charts; it's just that I don't believe in trying to make market guarantees, and it's part of remaining unbiased. So as always, be careful out there, good luck and happy trading!