Yesterday, I read a chat comment on CEO.ca that said "With TA (technical analysis) one is never wrong, you just draw new lines on the chart". A clever snipe at TA, combined with some truth.
The effectiveness of TA depends upon the practitioner and Twitter is filled with "technicians" who love to practice "hindsight TA" because they are never wrong. They simply use hindsight to ensure the charts they post are always on the right side of the market. Perhaps the reason they post so many charts is that they don't actually trade, drawing charts and selling subscriptions is their primary source of income.
The truth is that "TA" is open to interpretation, just like anything else in life (remember that even numbers and accounting statements are open to interpretation, just ask Elon Musk and Tesla's CFO). However, to actually be a profitable market participant who implements TA one must actually make real decisions while the market is open without the benefit of hindsight.
Drawing pretty charts is one thing, making money in the market is another thing entirely.
It's true that chart patterns morph and conditions are constantly changing in markets, so it is also true that our interpretations of charts should also change often. There is nothing wrong with that. In fact, staying stuck in a single interpretation would be the real mistake. A costly mistake.
The truth is that charts don't tell us what will happen in the future (accounting statements and "news" doesn't tell us the future either). Charts are best used to effectively manage risk, and to help gauge potential profit. Charts also help us to clearly understand trends on different time frames along with important support and resistance levels (price levels of substantial supply and demand).
If you are trying to use charts for any more than the above, then you might be deluding yourself. There is nothing magical about information from the past. After all, that's all that charts contain, information from the past.
Now that I've gotten that off my chest let's look at a real world situation that is relevant to us today. The gold miners are entering the 5th day of a pullback correction, the deepest correction since the breathtaking rally began in March:
It's been more than a year since the GDXJ fell five days in a row (April 2019) - this is the prospect we face today as spot gold sinks back below US$1700 and S&P futures surge higher on economic reopening optimism.
If we forget the "fundamental news" and simply focus on the chart it's logical that the $43 level should offer support on the GDXJ daily chart. Not only is there an open gap at $43.34 that needs to get filled in, but the $43 area was previous resistance that should now serve as support. It also makes sense that GDXJ was due for a ~15% correction after the massive rally from $20 to $50 over the span of two months.
We will want to watch the Daily-RSI(14) to see if it holds above the median line (50), as true bull markets do not fall below this median line on the daily chart for very long (sometimes it can happen intraday during the steepest corrections).
For my part i'll be looking to buy the dip in gold miners today. However, my time frame and investment objectives are probably different than yours so this is not investment advice ;).
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