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Technical Tuesday: 0-Minute Abs

By Chris Rowe September 23, 2013 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

The headline, alone, is intriguing. 

"8-minute abs" was a very effective headline used to market an exercise video.  I mean, what a hook.  How could you not look. 

The movie "Something About Mary" mocked that product in a scene where Harland Williams tells Ben Stiller he has a product that will revolutionize exercise: "7-minute abs"!

The "financial publishing/education" business is full of those 8-minute abs style hooks as well.  So don't fall for the scam!  The scam being the old "You can do this with your eyes closed" pitch.  Believing there is no work involved is a great path to an expensive lesson. 

Let me give you an example...

Today, the stock market is overbought.  It did make a short-term jolt higher, as I said it probably would, but that upward momentum is quickly running out of steam. 

It is forming a very potent bearish reversal pattern called a "Rising Wedge" (that is, if it's confirmed to be moving below the lower red line).  Take a look at the chart below and look at the red lines. 

Now, before you read any further, consider how simple this is so far.  It's a "Rising Wedge".  It's a wedge.  It is rising.  I connected higher highs to higher lows with a narrowing trading range. 

S&P 500 June 2012 - September 23, 2013

So far this is easy. 

Here's one more simple fact that makes technical analysis seem super easy:  Look at how the upper red line (drawn from the May high, connected to the August high and extended out) created a resistance level that we just ran into a few days ago.  That would have been a great time to sell some covered calls or even lighten up on your bullish positions.)

And if I show you a historical example, it seems even easier.  Notice what happened when the lower red line was violated.  The market sat around for a few days then dropped like a rock.  Doesn't it seem clear as day?

S&P 500 October 1998 - June 2001

What if I tell you where the market is likely going next, based on this very simple example?

In the first chart (today's market), as well as in the second chart (the 2007 top), you can see there are two horizontal blue lines.  The blue lines, drawn horizontally from past proven support levels, represent the potential price targets.  So you know exactly where to consider getting out of a bearish trade.   

("Price targets"?  This is the part that makes technical analysis seem extremely simple, but incredibly desirable.)

The very thick blue line is where the market will probably go before finding some sort of support.  (The upper thin line is one potential support level but not as potent.  You can see that in the lower example, in the year 2000, the first thin blue line was in fact, tested for a while.  But ultimately the market moved to the lower blue line and then even further down.) 

The blue lines in the upper example, in the current market, are where the market is likely to go if the "Rising Wedge" formation is completed.

What Am I Getting At?

One of the easiest types of analysis, which has proven to be very effective, is Technical Analysis.  But don't be tricked into believing that you can conquer the financial markets simply by studying technical analysis for a couple of hours.  There are  caveats, things to consider, historical examples to understand and then, of course, there is the whole "risk management" thing to learn about.

You have to know what else to look at and how to interpret those other things.  And as the market evolves, those other factors evolve as well.  For instance, right now, sentiment indicators show there may be some fuel for this market to run a bit higher.  Taking that into consideration, we know that short-term internal indicators show that this upwards move is now overbought and appears to be reversing lower.  More importantly, the intermediate-term and long-term internal indicators also show an overbought market that wants to decline.  Thus, we do not want to be bullish here at all.  The risk to bulls is very high at this point. 

All of those things can change over the course of the next month.  But for now, if you're bullish, it pays to get out of the way, sell options to collect income on your positions, or hedge the account by taking bearish positions on the weakest overbought sectors.

Watch Out

Many of our "competitors" out there will show you a few easy tricks (like one simple chart pattern) and promise you'll only have to take a couple of hours to learn something that will make you millions.  But as soon as the market evolves a bit you're left holding the bag.

At the Institute For Individual Investors, we tell our people that it is going to take some time and effort and practice.  We hold your hand throughout the ups and downs and teach you along the way how to handle them.  We only hire educators with real world money management experience who are willing to put in the work that individual investors need in order to develop everlasting money management skills.  

We also provide the cleanest and easiest to use classroom platform with online communities and short video lessons, point systems, trophies and badges and a lot more.  We want it to be exciting and fun or you'll get bored and go next. 

Anyway, that's my article for the week.  See ya next Tuesday.