Chart-based trading behind big market swings
Support levels. Moving averages. Breakouts.
That strange language is being spoken more forcefully on Wall Street these days. It is the language of technical trading, which is helping to drive recent wild gyrations in stock prices.
Within hours, stock prices have been leaping and falling in 300 and 400 point bursts.
Technical traders all but ignore fundamentals, such as corporate profits or expected growth rates. Instead they rely on stock-chart analyses that signal when to buy or sell the entire U.S. stock market.
In the absence of clear signs about the economy's direction, more of Wall Street is turning to technical trading. When the charts say "sell," a herd of sellers emerges, magnifying declines. If prices fall far enough, another wave of technical selling is triggered and the decline is intensified. At some point, a threshold is reached where the charts say "buy," and stock prices get whipped higher.
"You have to have some idea of earnings and multiples for fundamental analysis," said James Masserio, the head of equity derivative trading at Credit Suisse. "But now there is essentially no clarity on future earnings for the next 6 to 12 months."
When traders can't forecast the future, they turn to what has happened in the past. "Technical analysis at its heart is just a graphical representation of human emotion and psychology," said Richard Ross, a global technical strategist at Auerbach Grayson, a New York-based broker. He says that price charts show that markets -- and investors -- follow reliable patterns.
A generation ago, volatility was measured in days. Now huge moves up, and then down, can happen in a matter of minutes. The moves are so fast these days because computers programmed to analyze charts are executing trades without any human intervention.
Comment: Small investors (like me) who have limited free trades (I get 100 free trades a year on my Wells Trade account) need to be buy and hold value investors - and be patient. Latest stock I am buying: Kimberly-Clark Corporation. Not exactly exciting ... but folk will still be buying Kotex, Kleenex, and Huggies. Note the 4.5% yield.