5 Ways to Improve Objectivity Using Technical Analysis
by Erik Grywalski
 
Note: The following lesson is meant to help you learn from the market and does not serve as investment advice for any specific group or individual. For more information, please read the HSR Terms of Use.
Technical analysis is often criticized by stock investors due to its alleged lack of reliability and inaccuracy.
However, do you know that much of the error/risk within technical analysis comes from the "analysis" of the market?
I wrote more about this topic here.
To summarize, technical analysis of the stock market is largely dependent upon an individual or group opinion.
Therefore, a potential problem exists within this relationship (individual/group vs. market).
The Problem within Technical Analysis
A biased view (bullish or bearish) that differs from reality (the market) can help to undermine the true technical message of the market if the opinion of the individual/group is favored over the market.
Unfortunately, instead of looking at the analysis for potential errors, the market's technicals are often blamed if price goes the opposite way.
This contributes to a negative view of technical analysis, which is unfair to the craft and those who rely on it to manage risk in the stock market.
A Solution within Technical Analysis
As an alternative, it would be better to help improve individual/group analysis by promoting greater objectivity using current and historical market facts.
After all, the market is always right, so the individual/group is likely off the mark when their technical analysis is incorrect.
Increased objectivity may lead to more accurate stock market research and thus help technical analysis to be viewed as an essential way to analyze the stock market.
The Importance of a Chart in Technical Analysis
Technical analysis requires the use of a chart.
You can assume a chart that records price (high, low and close), volume and several moving averages is sufficient to read the market's current technical opinion.
A stock chart is merely a visual representation of what the majority of stock investors around the world think (bullish or bearish) about a particular company.
Without it, you have no way of knowing how most investors feel about a stock.
Do you think it's a good idea to make a stock market decision (buy or sell) without consulting the majority opinion of stock investors?
That's why Step 1 of Stock Investing 101 is to look at a stock chart to get the market's opinion.
If you like a stock, but the market doesn't, you'll likely lose money if you choose your personal opinion over the market's.
This is the main benefit of technical analysis and it's free to anyone who's willing to be objective and listen to the market.
Thus, a good use of technical analysis is to read the current opinion of the market to better manage risk.
Predictions and forecasts can get into trouble when they're wrong.
Unfortunately, being wrong is inevitable in the stock market.
Because of this fact, it's smart to take one day, one week and one month at a time according to the current market.
Technical analysis that's driven "according to the current market" tends to be more objective than technical analysis completed from a biased view (unobjective) that's driven off an opinion.
With this in mind, improving objectivity should be a main goal within technical analysis education.
Here are 5 Ways to Improve Objectivity Using Technical Analysis:
1. Review Stocks each Week to Determine the Market's True Accumulation/Distribution Profile
I believe in doing a majority of my stock market research (chart review) on Friday evening and over the weekend.
Why do I feel that this is important?
I like to use weekly charts for my research.
Weekly charts provide a great feel for whether the most recent week was bullish or bearish because a positive or negative weekly close for the market (S&P 500) is not always associated with net accumulation (buying) or distribution (selling) within individual stocks.
For example, the Week Ending 01/31/14 featured a negative close for the S&P 500 (-0.43%), but individual stocks showed more accumulation than distribution behaviors.
Thus, the week displayed positive price action underneath the surface of a down stock market.
The market fell hard the following Monday (02/03/14) before rallying to close higher (0.81%) by Friday, February 7th.
Stocks also showed strong follow-through accumulation during that week (02/07/14), which you wouldn't have noticed if you only looked at the market's close for the current (0.81%) and preceding week (-0.43%).
As of June 2014, the Week Ending February 7, 2014, marked the most recent low for the S&P 500.
If you really want to know what went on in the market, then you have to examine its stocks and not just the index itself (S&P 500).
Objective technical analysis is built around attention to current market details.
You can get this level of detail by looking at every operating company's weekly stock chart when the market closes each week.
For even more detail, you can separate your accumulation/distribution list into groups/sectors so you know where the strength/weakness was concentrated and if it was broad-based or not.
At the end of this weekly exercise, you'll have specific market facts to be more objective in addition to the market's close.
I know that this seems like a huge task for the weekend because there can be anywhere from 5,000 to 7,500 charts to review.
However, if you scale the list down to liquid stocks (Market Capitalization of at least $3B), remove non-essential groups (Utility, REIT, etc.) and ETFs, your list can shrink to 1,000-1,500 stocks from 5,000 stocks without sacrificing a lot of accuracy/detail.
This may still be too much for you and that's okay. If that's the case, find someone who can do this review for you.
This exercise will help you recognize important market facts underneath its surface and help you stay more objective during the research process.
If you're bearish (minority opinion), but the market isn't (majority opinion), who should you listen to?
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