Technical analysts attempt to predict direction by studying past price action and charts. And understandably, there are critics. In fact, some see it a pseudo-nonsense.
Forbes for example says it’s fundamentally flawed.
Legendary investors such as Warren Buffett and Peter Lynch agree.
Buffett has said he “realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.”
For Lynch, charts “are great for predicting the past.”
But the fact remains that it does work – quite well actually – especially when technical analysis is used to gauge excessive fear and greed.
Here are two I personally like to use.
One is the J-Hook Pattern. It’s called that because it takes the shape of the letter J.
Typically, these are found in a stock uptrend. At some point, the price of the stock pulls back to a point of indecision, which can often be marked by a doji cross candlestick. From there, prices begin to rise, creating a J-hook pattern. From there, we typically see a resumption of trend.
For example, we can see a clear J-Hook pattern on this chart of Netflix (NFLX).
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However, by the time you spot the J-Hook pattern, you may have also missed the recovery off the lows using my second favorite indicator of trend change. This indicator simply requires agreement of four technical indicators.
In fact, it’s so powerful that success can be as high as 85%.
Look at the chart of Netflix (NFLX) again in August 2018. Notice the dip prior to the J-Hook.
For one, NFLX fell to its lower Bollinger Band (2,20), where it came over-stretched. Relative Strength (RSI) began to reverse along with MACD. And Williams’ %R was stuck deep in oversold territory below its 80-line.
With all indicators in agreement, the oversold stock began to break higher.
Granted, anyone can tell you this happened after the fact. So go ahead and pull up a chart of your favorite stocks, wait for a dip, and confirmation with these indicators. Then, wait for the likely reversal higher. It may just change the way you trade.
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