Can
Charts Predict the Future?
We should get
the answer to this question out of the way first. The answer
is, “no”. You cannot predict the future
by looking at stock charts. Oh yes, there are plenty of people
who will disagree with me on this. I know that there are plenty
of people who make their investment decisions based on astrology,
card reading, visitations from the departed, or taking hot tips.
From what I have seen so far, these techniques don’t work
overly well.
On the other hand, I have observed that a rational study of stock
charts can and will provide valuable insights to the probable course
of price change in the near term. The reason that this is so is
because the study of stock charts is essentially the study of history.
There are patterns of price change that appear over and over again.
This is what we look for in the charts.
I am going to show you
a fascinating chart that clearly shows a certain pattern that
shows up over and over again. It is called “Support.”
The points
shown by the two blue arrows are when prices dropped down through
support. When you see this, expect prices to then
move down further in the following days and weeks. This is, in
fact, one of the most important patterns/principles of chart
analysis. It is one that I teach my students to always be aware
of.
In this case we had
two distinct warnings that prices were headed down and that it
was not time to buy. If you had investments that
depended on the prices shown on this chart going up, you should
have sold on the first and certainly the second “Down-side
breakout”.
You see, this pattern
does not predict the future. It simply points out to us that
when such a “look” comes up on a chart
prices usually will continue downward. In the next chart we’ll
add more time so you can see what actually happened after these
signals were triggered.
On the third
day of trading after that second ”watch out!” signal,
the Dow Jones Industrial Average suffered its largest one day
point drop in history! The chart absolutely
warned us that something was coming. We had no idea how powerful
the drop would be but we should have been on alert to watch out.
Do you know what date the huge point drop arrived? It was September
17, 2001, the first day the markets opened after the now infamous
9/11 terrorist disasters. No, there is no magic here. All you would
have needed to do in order to have avoided this amazing stock market
loss was to have kept one eye on the chart. By doing this, you
obviously have a distinct advantage over those who do not.
Therein is the great
virtue of looking at the “charts”.
They provide insights and hints that are just not available in
other places. These insights can then be translated into real stock
market profits. |
