5 Ways to Improve Objectivity Using Technical Analysis

Note:  This 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.

By the way, it's not wrong to ask your broker/advisor/other what kind of research they do over the weekend. 

Remember, it's your money.

Another option is to start this exercise with only the S&P 500.  That's just 500 stocks instead of 1,000-1,500.

Finally, you'll be better off if you get a weekly perspective instead of the daily noise that's more common.

Do you remember Monday, February 3, 2014?

The market was down big (Dow Industrials -325 points) and many people turned bearish on the market. 

There was even a comparison circulating on the Internet about how the current market (2014) compared favorably to the 1929 Stock Market BEFORE it crashed 90%.

By the end of the week (02/07/14), the market rallied all the way back and closed near the top of its weekly range.

The market (stocks) also showed a lot more weekly accumulation than distribution behaviors. 

Bears didn't know what to say about the market's turnaround.

Since that negative day, the Dow Industrials is up 10%+ (as of June 2014).

In the end, it's very hard to argue/dispute market facts because they come from the majority of stock investors.

Getting a weekly perspective on individual stock price behaviors can heighten your attention to detail and put you in a position to be more objective.

Current market facts help you place your opinion in line with the market (path of least resistance) and not jump to conclusions based on similarities to past market cycles (1929 Stock Market).

I complete this exercise each weekend (and monthly) and post my accumulation/distribution summary on Twitter.

Since I've started doing it, it's given me vital market facts that help to improve my own objectivity and direct my focus solely on the market.

2.  Focus on the Entire Market and not just on Leading Stocks

Tracking leading stocks is a great way to read the market, but what happens when the market's advance is broad-based?

A leading or elite stock is usually liquid, part of a strong industry group, has a high RS (Relative Strength) and impressive fundamentals (earnings and sales growth).

A breakdown in leading stocks doesn't necessarily correlate to a market correction because stock leadership can be widespread/rotate and involve stocks that may not be considered elite.

For instance, a stock can have a high relative strength rating, but poor-to-mediocre fundamentals.  This typically wouldn't be considered a leading stock, but it can still outperform (lead) the market because the market anticipates improving fundamentals.

Last year (2013), there were several times that the market looked as if it was going to correct, but it quickly reversed and ran back to new highs frustrating the bears and those expecting a more substantial market correction.

In 2014, leading technology stocks and small caps fell in the 1st half of the year and many were calling for a significant market top.

Some even hinted at an end to the bull market that started in 2009. 

However, the market shrugged it off (as of June 2014) and continued higher on the strength of other sectors/industry groups.

Maybe the market will have a more substantial correction in the second half of 2014, but until it shows more evidence of weakness on the charts, there is no reason to be outright bearish.

If you review all of the stocks in the market at the end of each week (#1), you'll know what sectors are basing and/or leading so you're not too quick to judge the market when you see leading sectors/groups decline.

Following leading stocks is good, but don't forget about the rest of the market because it can push stock indices higher when leading names come under pressure.

3.  Keep a List of Stocks Basing and Breaking Out

This list helps you keep an eye on the market's health in two (2) ways:

A.  Monitors Future Stock Leadership - A base is a precursor of stock leadership. 

Does a stock's base mature or breakdown before it breaks out?

B.  Monitors New Stock Leadership - When a stock breaks out, it signals potential market leadership.

Does a stock fail or continue higher after breaking out of a base?

The results of Groups A & B can tell you a lot about the market's health.

For this exercise, refer to your charting software each day after the market closes and identify stocks that fit into Group A (Future Stock Leadership) and/or Group B (New Stock Leadership).

You may want to focus on the top 50-100 $Gainers/$Losers and the Most Active stocks on both the NYSE and NASDAQ.

You can check your list every week or every other week to stay on top of the market.

If your list changes either way, you'll have a better idea if the market is stronger or weaker because you'll have the technical evidence (market facts) to refer to in your analysis.

I know that this seems like a lot of work (and it is), but the more market facts you incorporate into your review, the more opportunity you'll have to be objective. 

Remember, if you focus on factors outside of the market (charts), you'll have a tendency to become less objective.

4.  Review Market History to Determine What's Possible Today

History tends to repeat itself, but that doesn't mean you can use it to predict the future.

First, the market must confirm your historical comparison with relevant price action from today or else you're predicting what's going to happen.

Do you remember the early 2014 comparisons to the 1929 Stock Market?

The 2014 chart may have looked similar to 1929, but individual stocks never rolled over. 

In other words, the market didn't confirm the bearish prediction for the stock market.

In fact, there was never a concern that 1929 was happening again because stocks remained strong and/or based as they normally would when a consolidation enters into the picture.

In my opinion, stock market history is best used to read the current market and get an idea of potential outcomes based on one series of events (market facts) happening over another.

Reviewing market history helps you learn about the potential market outcomes.

Nobody knows for sure what will happen in the future, so why should a one-sided prediction (inflexible) take center stage?

On the other hand, an outcome is a fact that can't be denied. 

Its final label may change if the market changes (flexible).

A base breakout (outcome #1) is a bullish outcome that occurs after a stock corrects and matures in its base vs. correcting and failing in its base (outcome #2) or rolling over into a downtrend without a base even forming (outcome #3).

You'll have the opportunity to be more objective if today's technical condition trades similar to the market's past. 

In other words, you won't jump into the bull or bear camp without the market facts to support your stance.

I have many historical examples for you to review on this site, but here's one that may be helpful to your education.

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