Get Objective Weekly Market Facts that Help You Better Manage Risk

Historical Example of the Benefit of Focusing on the Weekly Time Frame

October 2014 featured a swift market correction that may have been exacerbated by an international Ebola Crisis.

With this turmoil present, market analysts were out in the media during the Week Ending 10/17 predicting that the market was going much lower and some even warned to watch out for a long overdue bear market.

Ironically, the market bottomed on 10/15 (Wednesday) and rallied 14% to new all-time highs by early November 2014.

What happened to the bearish outlook?

I believe that many spoke too soon (before the week was over) and failed to use relevant market facts in their technical analysis.

Again, like the previous example (Flash Crash), this contributed to their analysis being faulty (subjective), which didn't help enhance the professional reputation of technical analysis.

What was my perspective at the time?

To be honest, it doesn't matter what I thought, but it sure does matter how the market acted for the Week Ending 10/17/14.

My technical review completed Friday-Sunday (10/17-10/19) indicated that market facts (Week Ending 10/17/14) showed strong weekly accumulation behaviors within stocks after the S&P 500 undercut its August 7th low on 10/13 (Monday).

This alone didn't make you bullish, but it put you on alert for potential upside price action after the 10% drop the prior month.

Adding to the market's seemingly bearish tone was that it also closed below its 40 Week EMA for the first time in nearly two years.

Finally, the market even finished down for the week, but it closed near the top of its weekly range, a positive divergence to note.

Here is a summary chart that recaps the market's technicals for the Week Ending 10/17/14.

Did you notice how primary technicals (weekly stock price behaviors) didn't paint the same negative picture when compared to the dire opinions issued throughout the week?

Historically, the October 2014 Low looked similar to the August 2007 Low that went on to form a V-shaped bottom with a rally to new highs in October 2007.

Here's the historical review that I created on 10/25/14 (10 days after the low) that compared 2014 to 2007.

I'm sorry to sound like a broken record, but many again used subjective analysis to argue that a V-shaped bottom in 2014 was improbable.

However, the market thought otherwise because it rallied straight up to new highs by November 3rd.

Yes, October 2014 formed a similar low to 2007 (V-shaped bottom and rally to new highs) despite the disbelief by many individuals.

One last chart from this example that nicely recaps the V-shaped bottom and vertical rally in late 2014.

Can you see how technical analysis can be very unreliable if there isn't a specific process in place to separate market facts from personal opinions?

RULE #2:  Use weekly market facts to stay in gear with price over the weekend.  Say little about the market until the week is over AND the technical facts are completely reviewed.

3.)  Study and Learn from the Market's Technical History

History tends to repeat itself is one of the major principles that backs technical analysis.

Therefore, learning from the market's technical history has the potential to make one more objective AND profitable if they can also master the personality/psychological challenges tied to investing real money in the market.

My site has a wealth of historical information (Steps 1 & 2) for dedicated students of the market.

Here's one example that I used in April 2014 that shows how learning from the market's technical history can help you better manage risk.

In this case, "better managing risk" related to the risk of being underexposed in a hot Industry Group (Biotechnology) and Sector (Medical).

Historical Example of the Benefit of Learning from the Market's History

In early 2014, the Biotechnology Index (BTK) had a correction after a steep run in 2013.

Many were eager to call the BTK a "bubble" and some even compared it to the 2000 BTK when biotech stocks crashed during the start of a vicious bear market that would last through 2002.

However, I noticed that the 2014 BTK was experiencing what looked like a normal correction after a hefty advance the prior year.

In fact, it was showing striking similarities to the corrective action seen in the 1997 Broker/Dealer Index (XBD).

Back then, online brokerage accounts were starting to rapidly grow because the Internet opened up a whole new market for accessing money and making individual investment decisions without a broker.

The beneficiaries of online trading, the brokerage stocks (Schwab, E Trade, etc.), exploded higher.

I fondly remember placing some of my first online "stock investments" using Datek, which I believe was later acquired by TD Ameritrade (AMTD).

To get back on topic, here's my brief analysis of the 2014 BTK compared to the 1997 XBD, which was completed on April 19, 2014.

And as compared to the 2000 BTK, the 2014 BTK looked (technically) nothing like 2000.

This chart shows the clear technical differences between 2014 and 2000.

In the end when it was all said and done, the 2014 BTK acted quite similar to the 1997 XBD in a much tougher market.

Take a look here.

Do you understand how historical market facts can help you read today's market using an objective perspective?

RULE #3:  Learn from the market's technical history to stay more objective and have the potential to make profitable decisions.  History tends to repeat itself because human emotion never changes.

Because technical analysis is highly dependent upon an opinion, it's critical that the opinion given is the market's and not an individual's own thoughts or feelings.

This can be more achievable with a research process that's focused on mining (collecting) the market's opinion through current/historical technical facts.

As you're aware, I prefer primary technicals (price and volume) for my market facts.

In my opinion, they are the purest technicals that you can get from the market and as I've previously described, they are less prone to analysis error.

Historical Example of the Benefit of a Research Routine Built Around the Market

Here's a chart that displays the advantage of using primary technicals vs. emotional thoughts that frequently emanate from individual opinions.

As the chart shows, paying attention to individual opinions leaves you confused (everyone has one) and often on the wrong side of the market expecting something that never materializes.

On the other hand, focusing on the market's facts through price and volume technicals (objective technical analysis) puts you in a much better position because you're aligned with a majority opinion from stock investors around the world (the market).

If stocks predominately show "accumulation or distribution behaviors" then there is little reason to listen to opinions that argue the opposite because it places an individual/group (minority opinion) up against the market (majority opinion).

Which one would you rather listen to when you have to make a decision in the market that may impact you or your client's money?

A focus on the majority leads to a more accurate assessment of the technical landscape so that you can be in a better position to manage market risk.

My last chart (above) represents just a portion of the weekly research that I developed to extract facts from the market's majority opinion.

RULE #4:  Be humble and realize that technical analysis is about the market.  Build your research process to reflect this philosophy because it's often absent from technical analysis.

To conclude, I really have no right to give you my opinion on the market without concrete and broad technical facts taken directly from the source (market).

You should insist on getting the market's opinion so that you can use it to your advantage.

Before you value technical analysis, I believe it's vital that you understand how your source stays objective during the "analysis" of the market's technicals.

While pure objectivity is unrealistic, you deserve a more objective analytical perspective that's focused on the entire market and not just a personal opinion born from limited technicals that inevitably leads to predictions on where the market's going.

Unfortunately, human nature gets in the way during the analysis of the market's technicals.

It's understandable to expect others to respect an individual's purported market expertise, but in reality, technical analysis is about the market's opinion.

This may be hard to accept, but there is no shame in taking a backseat to the market because it leads to improved analysis of its technicals.

That really presents two (2) analysis options:

Option #1 (Focus on the Majority): 

Develop a disciplined process to objectively collect the market's technicals (facts) to better manage its risk.

Option #2 (Focus on the Minority): 

Personalize the analysis and try to convince others using individual technical predictions backed without any real confirmation from the market (majority).

As I've shown, without a specific process dedicated to extracting the market's majority opinion (facts), technical analysis becomes nothing more than a personal opinion on the stock market that is derived from charts.

In the end, it's hard to beat analysis that's driven off cold hard market facts (price and volume) because it comes from a majority opinion. 

With that in mind, here's a summary chart of the four (4) historical examples that I reviewed with you to recap the advantage of using market facts vs. individual opinions.

My analysis collects these facts within a more objective framework so that you can use the market's technicals to better manage risk.

I look forward to getting to know you and to understand your specific needs when it comes to analysis of the market's technicals.

If you have any questions, please feel free to contact me.

Best Regards,

Erik Grywalski