Tough Questions

Q: What do you mean by "dynamics of price action" ??

MJ: Price action is actually the results of finite trades . Therefore, it is by nature moving all the time to reach balance.  For example, let's look at a company with the constant real value at $20 a share. However, over time, the share price will not staty at $20 as a constant straight line. Rather, the price will fluctuate along the $20 mean value. When the price drifts far enough above $20, some share holders would feel that the price good enough to sell their shares. When the price drifts low enough below $20, some buyers will feel the shares to be good value and start to buy in the shares.  That is the mechanism of the price action.  What you would see is a price action that oscillates along the mean value of $20....even though the "value" of the stock is absolutely constant at $20 .

This is just one simple example of "price action dynamics".   

Q: What are the merits of Technical Analysis?

MJ: Technical Analysis studys the dynamics of price action. Since the price action is basically a result of supply and demand, the price movement is subject to certain patterns.

The most common misconception about Technical Analysis is that the charts will predict and forcast the future movement.  Those people fail to recignize that, price dynamics is only one of many forces that move the market.

Technical Analysis  studys only the "natural modes" of price action...meaning that the "system" is balanced. However, in most cases, the "system" is subject to external forces , such as, better than expected earnings report, surprising remarks from the Fed or an outright down grade by Goldman Sachs.

When the market moves with balanced force, either it is up, down, or side ways, the price action will follow the "pattern" very well.   However, it is when the price action does not follow the "pattern" that  a mature and seasoned chart reader could see the most valuable  insightful information about the existence of one or more important external forces.   

   

Q: How do you tell if the trend is UP or DOWN?

MJ: Trust your common sense. Look at the charts. If the price keeps moving higher over time, then it is UP trend. If the price keeps drifing lower, then it is DOWN trend.

There are two important parameters. One is the time frame. A day trader would look at ticker by ticker to decide if the trend is UP or DOWN; but a long term investor might look at the monthly chart to see the trend.    The other important parameter is the natural amplitude of the price movement. Price moves up or down in waves.  One must tell the difference between  wave oscillation and trend.

See the attached chart as example, if your investing for months, then the trend is UP. If you are investing for days, then the trend is DOWN.