How To Use Technical Analysis To Figure Out Markets
Beware Chart-Coma
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This week, we are going to dive into technical analysis.
Heads up: I know very little about this, so this is a classic case of—I bet this is true for many of you—the blind leading the blind. If you know a lot, stop here, or if you read on, at least be kind and leave a comment!
These are the areas of focus:
Why bother with technical analysis?
If you want to use it, how should you get started?
Is it a useful tool?
Why Bother With Technical Analysis?
Technical analysis is a deterministic view of the markets. There is some comfort in that: if you can figure out the plan, you can lean into the plan and live better, invest more successfully.
It doesn’t mean there is nothing to do. You have to work to figure out the plan and then you have to follow it.
To give some context to all this, I recommend Neil Howe’s work on the Fourth Turning and reading a summary of his two books, The Fourth Turning and The Fourth Turning is Here.
The books are long, and I struggled to get beyond 100 pages or about 30 minutes on Audible (waste)…
…here is a summary from Perplexity, my go-to search app, post-Google:
The Saeculum and Four Turnings
Howe argues that history moves in cycles called "saecula," each lasting about 80-100 years (roughly a long human lifetime). Each saeculum consists of four "turnings" lasting approximately 20-25 years:
The High (First Turning): A post-crisis era of renewal, stability, and strong institutions.
The Awakening (Second Turning): A period of spiritual exploration and rebellion against institutions.
The Unraveling (Third Turning): An era of strengthening individualism and weakening institutions.
The Crisis (Fourth Turning): A decisive period of upheaval where the old order is replaced by a new one.
Generational Archetypes
Howe identifies four recurring generational archetypes that play specific roles in each turning:
Prophets
Nomads
Heroes
Artists
These archetypes shape and are shaped by the turnings they experience.
Current Fourth Turning
In "The Fourth Turning Is Here," Howe argues that we are currently in a Fourth Turning, which he believes began around 2005. He predicts this crisis period will reach its climax in the 2020s, with significant societal changes by the early 2030s
Key Predictions and Observations
Regime Change: Howe suggests we're heading for revolutionary regime change, with the "old American republic" collapsing and a new one emerging.
Conflict Resolution: He predicts that the current deadlock between opposing factions ("blue zones" and "red zones") will be resolved, potentially through significant conflict
Millennial Generation: Howe sees millennials as potential "Heroes" who will be crucial in resolving the crisis and establishing a new order.
Technological Influence: The author envisions a future where technology, particularly AI, plays a significant role in shaping society.
Global Order: Howe predicts the victorious generation (likely millennials) will reinforce or re-establish a U.S.-led liberal international order.
The cycles Howe describes capture the essence of charting or technical analysis.
Howe makes a deterministic argument about historical cycles but gives the archetypes some agency within those cycles. (Phew!)
At its core, technical analysis says that the prices of everything in a financial market capture all the information about those things. Cycles are there to be discovered.
The analyst's job is to discern information, uncover and trace patterns, then project them into the future to inform trading or investment.
In Howe’s construct, the analyst is the archetype.
The act of charting is one of discovery and forecasting but also contains agency. Based on what is discovered, the actions feed back into the market, and so on…
In other words, although the cycles are bigger than us, we have some tools to shape as well as be shaped - don’t despair.
If You Want To Use It, How Should You Get Started?
Because this article is more of a roadmap than a wisdom bite, I will give you some places to research and decide which direction and how far you want to take this.
I find it fascinating, but it doesn’t fit my brain well.
I have the same problem with higher math and physics: I have a lot of respect, but as soon as I see Greek characters, I reach for Tylenol.
Here’s a good primer from Investopedia:
While it's certainly possible to learn technical analysis from a book, the most effective way to learn everything you need to know is from a course. A quality course will include much of the same content as a book, but it adds visual learning along with expert instruction for added insights, context, and real-world demonstration of the concepts.
For most people, that is a better investment of their time or money. All the courses in our roundup meet those criteria, but the benefits vary for individuals with different experience levels, learning styles, and budgets.
For example, if you're a complete novice to technical analysis, there is no better course than Travis Rose's Ultimate Candlestick Trading & Analysis Masterclass Bundle. His focus is on sharing his knowledge so you can avoid the mistakes he made starting out.
But if you prefer to put your knowledge to work while you learn, the Bearish Bulls is a great way to join a trading community that is open to helping new traders.
Having access to top-tier charts and analysis tools is critical for applying your knowledge. StockCharts is one of the best charting services that brings traders along with its standout Charting School.
With its comprehensive offering of educational resources, Chart Guys is a virtual soup-to-nuts source of everything you need to move all the way up the learning curve.
As with any challenging endeavor, you can't go wrong with learning from one of the greats. That's what the Charting School offers. Designed and instructed by the world-renowned technical analyst, JC Parets.
Finally, you can't do better than Udemy's low-cost, in-depth, expert instruction through its Technical Analysis Masterclass—our pick as the best overall technical analysis course. Here is their summary of providers (live links in the caption):
I am going to pick one and report back in a subsequent post!
Is It A Useful Tool?
I like how the folks at Real Investment Advice (RIA) frame this entire issue. They are a registered investment advisor affiliated with a commentator,
, who I think does great work in the podcast, Newsletter, and YouTube space.The face of RIA and someone who does weekly market updates with Taggart is Lance Roberts.
His most recent Bull Bear Report describes RIA’s philosophy this way:
Note: We are fundamental investors looking for long-term investment opportunities at RIA Advisors. Therefore, we use very simplistic technical analysis to manage short-term market risks in our portfolios. We have found through experience that the more complicated we make the technical analysis, the worse decisions we make due to “analysis paralysis.” As is always the case, everyone approaches investing differently. This is just how we do it.
Roberts’ view is that the charts he references - linked above and again here - offer a roadmap to understanding the overall macro picture.
RIA starts with a fundamental analysis to determine direction and destination (sector and then stocks/bonds within that sector) and uses the technicals as we use Waze/Google Maps/Apple Maps to check the traffic and make any necessary detours en route.
Charts can also indicate whether significant events have compromised the ultimate destination after the journey began—hurricanes, for example.
If I have to pick one chart from Robert’s piece that captures the sheer joy of charting (of course, I do) it is this one:
“That pattern seems quite evident in the [above] chart of the S&P 500 index. With the breakout of the “cup and handle” formation in place, a further rally into year-end seems to be the logical next step. Such suggests that any near-term correction to relieve overbought conditions should remain confined to the bullish trend. In other words, investors should consider buying any near-term declines.”
The picture is clear, and I see the logic. Investopedia describes it here.
If you want a reason to buy, this could be it.
On the other hand,
“While momentum and relative strength indicators show a positive divergence using daily technical analysis, the RSI (Relative Strength Index) also signals some caution with a negative weekly divergence. While the market has risen, weekly relative strength measures have declined, suggesting an underlying deterioration. Historically, such negative divergences precede short—to intermediate-term corrections.
Yes, these signals often precede corrections, but there are also periods of consolidation when the market trades sideways. Secondly, reversals of overbought conditions tend to be shallow in a momentum-driven bullish market. These corrections often find support at the 20 and 50-day moving averages (DMA), but the 100 and 200-DMAs are not outside regular corrective periods.“
What’s your takeaway from this? I’m confused. And I go back to the earlier comment about “analysis paralysis.”
The predictive quality of too many signals can be zero. If you are looking for a reason to do something, you can probably find it in the charts.
If you are looking for a reason not to do something, you can probably find that, too.
If you are looking to raise money around a particular trading or investing strategy, you will surely find charts to back it up, and you will be careful to back-test the strategy to ensure it fits the thesis.
Whether that strategy will work in the future is less certain.
Takeaways
It may be useful to take a course about technical analysis to learn what is available and what people are talking about. (I will report back on this).
Technical analysis is a useful tool for understanding how the markets respond to macroeconomic and geopolitical events from the top down.
It is also a useful tool for understanding what is going on from the bottom up, aggregating all the data from individual securities.
Beware the jargon and looking at too many charts - it’s like a buffet: you have to be disciplined or self-loathing and immobility (chart-coma) will set in quickly.
Very practical article, ty for sharing.