Nick’s Note: When it comes to getting a “technical” analysis of the market, I follow PBRG friend and master trader Jeff Clark. Regular readers know that Jeff ran a private money management firm in Silicon Valley for an exclusive group of about 100 wealthy clients. It was there that Jeff perfected his technique for reading stock charts.
Now, most people are likely confused by technical analysis. I won’t blame you if the charts make your eyes glaze over. But not only is Jeff a master trader, he’s also a master teacher. In today’s essay, he shows why reading charts isn’t as hard as you think…
By Jeff Clark, editor, Delta Report
Today, I’ll show you what will be the most profitable investing strategy of 2019.
If you’re a longtime reader of my Market Minute newsletter, you’ve seen me use this strategy plenty of times before. If not, you might be a little skeptical at first.
But I can assure you… Using this strategy, you’ll be able to double your money over and over this year—while most other investors rip their hair out.
I’m talking about technical analysis.
Now, if you’re new to trading, technical analysis might seem a bit “scientific”—even intimidating.
But really, technical analysis is much more of an art than a science… That is, if you try to force it to conform to strict rules and formulas, it’s likely to be wrong almost every time.
Try thinking of it the way I do: A chart of a stock (or index) is simply an emotional picture of the stock at a specific moment in time.
Stock charts tell me how traders/investors are responding emotionally at any given point in time. Human emotions are remarkably consistent. We tend to respond the same way, over and over again, to the same circumstances.
So if I look at a chart, find a time where the conditions were similar to where they are today, and note how the chart behaved afterwards… it can provide strong clues for what to expect in the future.
But technical analysis is emotional. It evolves over time. So conditions that used to provide a catalyst for a big move may need to get more extreme to cause a similar movement the next time.
Think about it this way…
When I first got married, I’d often come home from work, take off my socks, and drop them on the floor next to the couch in the living room. My wife would come home, see my socks on the floor, and get all ticked off about it.
In other words, she’d have an emotional reaction to her husband leaving his socks in the middle of the living room floor. This happened over and over again.
Now, think of how this reaction would look on a typical stock chart…
It’d start with a line trending sideways—my wife’s emotions before she knew all about my sock habit. You’d see the line climb as my wife got more and more frustrated…
Eventually, though, my wife got a little better about dealing with her slob of a husband, and I got a little better about not leaving my socks next to the couch. Leaving my socks on the floor no longer elicited the same reaction from my wife.
She still had the same emotions. But she had adapted. She had evolved. She suppressed her emotions and would need a bigger catalyst before getting upset with me again…
Over on the chart, things have calmed down. The line on the chart is headed sideways, with little action in either direction. There’s less volatility.
But in the background, energy is building. Those socks had to be going somewhere—and it wasn’t the hamper.
Remember, human emotions don’t change. They’re remarkably consistent. But emotions do evolve, and sometimes it takes a bigger catalyst to elicit the same response.
That catalyst was provided when my wife was vacuuming one day and moved the sofa in order to vacuum the carpet beneath it. She found about a dozen pairs of my dirty socks tucked beneath the couch.
You can guess what happened next on the chart…
Here’s my point…
A stock chart is simply the emotional representation of traders’/investors’ reactions to the stock. If we can spot previous patterns on the chart that look similar to how the chart looks today, then we can see how those previous patterns played out and trade the stock in anticipation of a similar reaction.
A lot of my trading strategy revolves around finding emotionally overbought/oversold conditions that are ready to reverse. Technical analysis helps me identify conditions where investors’ emotions have gotten extreme, and where I can see how stocks have reacted to similar conditions in the past.
This is exactly what traders should be doing in 2019. In the volatile market we’re seeing today, any extreme condition is likely to reverse. Likewise, any overly calm condition is likely to explode with energy in due time.
And here’s why: Periods of low volatility are always followed by periods of high volatility—and vice versa.
Consider this… In 2017, stocks just kept marching higher. Overbought conditions just got more overbought. There was nothing for traders to do. No volatility.
At the beginning of 2018, the stock market had just come off the least volatile period of the entire bull market. So investors who figured stocks would go up forever were greeted with massive drops in February, October, and December.
And here’s the thing… I think we’re in for an even crazier year in 2019.
Most long-term investors won’t know what to do. But this is exactly the environment where traders can thrive.
Like I told my readers last week, investors should take their gains for the year and sit this one out. It’s probably the best way to keep your portfolio intact.
But for traders who pay attention to technical analysis, there are opportunities to profit—every single trading day—no matter what the market does.
Best regards and good trading,
Editor, Delta Report
P.S. We’re quickly entering the best time to be a trader since 2008—which was one of the most profitable years for my subscribers ever.
The last time I saw a market setup like this, you could have doubled your money 10 different times with the technique I use in Delta Report. And you can learn more about my technique right here…
From Todd W.: Hi, Nick. I really enjoyed your essay on position sizing. (See January 18 Daily, “Here’s How Many Shares of Amazon You Should Buy.”) It appears to me that most exchange-traded funds (ETFs) don’t position-size. Is that the case?
Nick’s Reply: ETFs do position-size—but differently than we do here at PBRG. While we recommend putting an equal dollar amount in each of your positions, most ETFs weight companies based on their sizes in an index.
For instance, the SPDR S&P 500 ETF (SPY) weights its positions based on the companies’ market caps as percentages of the S&P 500 index.
The three largest companies in the S&P 500 are Microsoft, Apple, and Amazon. (They make up 3.7%, 3.4, and 2.9% of the index, respectively.) So those three companies would be the largest three holdings in SPY as well.
If you have any questions or comments for our editors, send them to us right here…
IN CASE YOU MISSED IT…
At the end of last year, President Trump made a surprising move—with hardly anyone even noticing…
The president signed a bill into law that opened up a multibillion-dollar market. And now, smart investors are staking an early claim in what could be the biggest investing story of 2019. Get all the details here.