Technical Analysis and Chart Interpretations. Ponsi Ed

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      Context: When John noticed the prolonged downtrend, he knew he wanted to open a short position.

      Fade: When a trader takes a position in opposition to a stock's movement, he or she is said to be “fading” that move. Possible reasons for fading a move include the following: The trader is expressing a lack of faith in the move; or believes that the market has misinterpreted a news item; or believes that the market has moved too far, too fast, and that the price is likely to return to a previous level. This term can be applied to a bullish or a bearish move.

      Context: John felt the market overreacted to the strong employment report, so he faded the rally in the S&P 500 futures.

      The more you use the terminology, the more comfortable – to the point of becoming second nature – it becomes. Most importantly, it leaves no questions about what you are doing and where you stand with your trades.

      Trading terminology is indeed a language unto itself. The ability to understand and apply that language is critical when communicating with banks, brokers, and other market participants. In many cases, the lingo used by traders allows them to describe a situation with precision and effectiveness. It is also a means by which a trader can identify other traders.

      CHAPTER 3

      The Cornerstone

      The concept of making money by trading the markets – not from producing goods or transporting them, but by trading shares of the companies that do so – has been around for centuries. The idea of striking it rich, or of improving one's standing in the world by the sheer force of one's intellect, is an intoxicating concept that has mass appeal.

      Trading markets have often been maligned as being unfair and tilted against the “little guy,” and with good reason. There are many examples of disparity in the trading markets, such as:

      • The use of non-public inside information by unscrupulous individuals and companies

      • The pump and dump antics of certain brokers, particularly involving penny stocks

      • Analysts that tout a company to drive up its price, in order to allow their employers to sell at more favorable levels

      • The use of high-frequency trading robots, which can place and cancel hundreds of thousands of orders in a millisecond

      Despite these hurdles, trading is still a meritocracy in many ways. The markets do not care about your age, your skin color, or your beliefs. Markets do not care where you grew up, who your parents are, or where you went to school. The only thing that matters is the ability to extract money from the market. If you can do that on a consistent basis, you can change your life and the lives of the people who matter most to you.

      Because of this strong appeal, men and women have been vying for centuries to create systems and techniques designed to anticipate market moves. This has led to a variety of concepts, many of them brilliant, some of them bizarre. Some techniques have stood the test of time, while others have faded into obscurity.

      One early form of technical analysis that has survived dates back to fifteenth century Japan, where rice traders are credited with developing what we now call “candlestick charts.” Today, candlestick charts are more popular than ever, and can be easily obtained by anyone. Other early forms of technical analysis failed to survive, disappearing from our collective consciousness like a lost language.

      Prior to the widespread availability of personal computers and the Internet in the late twentieth century, charts were usually drawn by hand. Frequently, updated books of printed charts were popular among traders, even though the fact that they were printed on paper meant they were, by definition, outdated.

      Modern technical analysis is generally recognized as beginning with Charles Dow. Mr. Dow was a journalist who worked for the Kieran News Agency, along with statistician Edward Jones and reporter Charles Bergstresser. The three men left the Kieran Agency and founded Dow Jones & Company in November of 1882.

      One year later, the company began distribution of the Customers' Afternoon Letter, a summary of the day's financial news. The two-page publication gained popularity with Wall Street investors, as it was considered a reliable source of actionable information. The daily letter eventually became known as The Wall Street Journal, which officially began publication in 1889.

      The partners conceived of a grouping of stocks – an index – designed to make it easy to follow the market. The first Dow Jones index began tracking the market in 1885; it consisted of eleven components, including nine railroad companies. That index was the precursor to what is now known as the Dow Jones Transportation Average. Here are its original nine rail components:

      Two non-railroad companies were also included:

      In 1896, it was decided to divide the stock index into two; one index for the shares of industrial companies, and the other consisting of transportation companies. This led to the creation of the Dow Jones Industrial Average, which was first calculated on May 26, 1896.

      Even today, the general public refers to the Dow Jones Industrial Average as “the market,” as in “the market was up 50 points today.” The reason why this index is so ingrained in our consciousness is because it was the first popular grouping of stocks to gain a widespread following. With just one statistic, it became possible to ascertain the general health of the U.S. stock market.

      The Dow Jones Industrial Average initially consisted of a dozen stocks, including General Electric, which remains part of that index today. Together, these stocks were considered representative of U.S. industry. The U.S. economy was much more focused on manufacturing in Mr. Dow's day, so it made sense that an index based on manufacturing and production would gain significance during that time.

      It's fair to ask if this index is as relevant in the twenty-first century as it was in the nineteenth. While the Dow Jones Industrial Average is not considered a broad measure of the U.S. stock market, it has evolved in order to remain a meaningful barometer of the U.S. economy. Initially, the index consisted of the following names: