Select Page
Chart of the Day / Why it’s Essential you Watch the 50-Day

Why it’s Essential you Watch the 50-Day

June 19, 2018

Technical analysis has always been rejected as a study of lines and charts without any real concrete or profitable results.

And clearly, an exhaustive debate on its usefulness would be long-winded, especially against those that only subscribe to fundamental analysis, as Warren Buffett does.

“Technical analysis is fundamentally flawed,” says Forbes.

“Technical analysis is stupid,” blared The Motley Fool.

“The poor reputation of technical analysis is well deserved.  It’s their own fault really,” commented Following the Trend.

But it’s just not true. Technical analysis is just as important as fundamental analysis.

As technicians have learned from Jesse Livermore, for example, “The price pattern reminds you that every movement of importance is but a repetition of similar price movements, that just as soon as you can familiarize yourself with the actions of the past, you will be able to anticipate and act correctly and profitably upon forthcoming movements.”

At its very core, technical analysis is the study of market behaviors, the psychology of fear and greed, which essentially drive all stocks.  While fundamental analysis focuses on the nuts and bolts of a company’s engine, technicians are concerned with supply and demand, and points of support and resistance.

In short, it’s essential because without it, you could miss out on key turning points.

In June 2018, it was safe to say the market was in train wreck-mode.

In fact, on June 19, 2018, the Dow Jones fell more than 350 points on fears of trade war escalation with China.  At the time, President Trump threatened to impose another $200 billion of tariffs on Chinese goods if Beijing follows through with its promise to retaliate against our first round of tariffs.  “Further action must be taken to encourage China to change its unfair practices, open its market to United States goods, and accept a more balanced trade relationship with the United States,” Trump said.

Along with it came two key technical setups all traders should be aware of.

For one, the Dow Jones began to break through its 50-day moving average to the downside.

Should we break below that line in the sand, there is then the possibility of us challenging the 200-day moving average at triple bottom support at 23,500.

So it’s essential that traders be very well aware of even the possibility at the 50-day.

Two, we want to make sure that if the Dow Jones does break below its 50- and 200-day moving averages to test triple bottom support, we need to watch to see if prior triple bottom support remains in place.  If we were to shatter that line in the sand, the Dow Jones could set up for a incredible decline and become negative for the year.

Also, don’t be quick to panic…

The key to doing well even in pullbacks is to remain calm. The last thing you want to do is sell everything. By doing so, you miss out on the resiliency rally that follows.

Remember, even in absolute times of panic, money can be made.

  • As even Warren Buffett will tell you, “Be greedy when others are fearful.”
  • As Baron Rothschild would tell you, “Buy the blood in the streets.”
  • And as Sir John Templeton would tell you, “Buy excessive pessimism.”