What's the direction of the markets? Who knows?

Reading stock charts. The most reliable information comes from the charts. If you trade stocks and options, you want to know charting basics.

VeeJay and Kabu Sensei were discussing market movement. VeeJay says, "Hmm, isn't there some way to figure out the next point on the chart?" No, there isn't. Well, is there some way to figure out in more general terms which direction the market will go? How about charts?
Could you use charting basics to try to predict the market movement for the next week, August 12-16? Sure, we know you haven't bothered to look at a stock chart in many, many months. But the Market can't go much lower than it is right now, you are probably thinking. So why not practice up a little?

Let's assume you are not a buy and holder. If you were, you would look at the charts and conclude one of two things which would make guessing the direction of the Market a moot point. The Market movements are cyclical. The Market always goes up, the ups minus the downs over time always have yielded an up which beats savings in banks. A glance at a ten year chart of the major indexes would indicate that now is a buy time. It appears that a good precedent has been set; S&P of almost 1600, Dow of 12,000 or so, and a Nasdaq at a whopping 5,132. An prudent long term investor might consider a chart of the Kondratieff Wave and be inclined to view the current conditions as a bottom, or if not a bottom, at least a good entry point. From this perspective, monthly stock purchases from this point in time don't look particularly unsound. The worst is probably over and further downturns would seem to be even better buying opportunities. The cunningly clever Kabu Sensei suggests another variation which a stock buy and holder might use under the present conditions, as of mid August, 2002; a limit buy order. Figure what the price of a stock or an index fund might be with a DJIA of 6,500 or an S&P of 650. Place the order for a price which is substantially lower than the current level and say to those big bad business titans, "Go ahead. Make my decade!" Just be patient. When the order fills, relax and wait for the DJIA of 15,000, S&P of 2,000 and Nasdaq of five or six thousand before cashing out.

Consider the following quote from Martin Pring:
"The goal of the (Dow) theory is to determine changes in the primary or major movement of the market. Once a trend has been established, it is assumed to exist until a reversal is proved. Dow theory is concerned with the direction of a trend and has no forecasting value as to the ultimate duration or size of the trend.
Starting in 1897, an investor who purchased stocks in the Dow Jones Industrial Average, DJIA, following each Dow theory buy signal , liquidated the position on sell signals, and reinvested the money on the next buy signal, would have seen the original $44 in 1897 grow to about $51,268 by January 1990. If instead the investor had held onto the original $44 investment throughout that period, the investment would have also grown, but only to about $2,500. In reality, the substantial profit earned by following the Dow theory would have been trimmed by transaction costs and capital gains taxes. Even if a wide margin for error is allowed, the investment performance using this approach would still have been far superior to the results of a buy-and-hold strategy."
Technical Analysis Explained , page 31.

How long have people been trying to use charts to predict movements of Markets? The Japanese started the whole thing with their candlestick charts circa 1600.
Beyond Candlesticks

Let's assume that you've done your homework. You've read, Beyond Candlesticks , Technical Analysis Explained , The Visual Investor , and Technical Analysis From A to Z , for starters.

We should make some further "clean" assumptions. Let's assume that you have an open mind. Many people have the notion, wrongly or rightly, that Market movements represent the results of battles between colossal titans of the financial world. Outcomes of battles between these giants can be difficult to predict, as they are often counterintuitive, if in fact there were any logic to them at all. While you may think of the Market as an interplay between big players with vastly superior knowledge, resources, and capabilities than puny John and Jane Q. Public, you should expunge those pejoratives from your mind. Assume that the Market, if not fair, is impersonal enough to be ruled by a human instinct which is base enough to have some measure of predictability. Assume that determinants of movements of the Market are random, or if not random, are unbiased and not completely controlled in a way which inexorably stacks the deck against you. In short, assume that you can make some money.

Why is charting relatively predictable? Because of these fundamental rules of charting:

Rule One:
Stocks which are bought and sold make the whole thing work.

Rule Two:
It doesn't matter who makes the Market move.
If X mega number of shares are traded at an average price Alpha, it doesn't matter whether a million nuns, a million monkeys, a million mafia consigliere, nor even half a million Jane Q. Publics and half a million John Q. Publics, had pushed the buttons to make the trades.

Rule Three:
If the objective and motivation were lacking, there would be no Market movement. The desire of anyone who had made those trades of X mega number of shares would have been to trade the shares again at an average price, Beta, to close the positions. The objective should be a constant; filthy lucre, profit. The motivation should be a constant; greed, the desire for profit.

Rule Four:
The Market is the ultimate bottleneck.
Stock buying and selling activity must be funneled through the markets which are limited to a few billion shares per day. That is a small proportion of the total number of stocks. Stock selling and buying activity can be visualized as it is funneled through the market bottleneck.

Rule Five:
Charts can be analyzed.
The sums of activities of all players which move markets is displayed for all to see in charts. You don't have to be a big player to see what the big players are doing. Predictions can be made with some reliability. Reliability of predictions is reduced because big players can read charts, too. They use whipsaws as head fakes to disguise their intentions.

Where will the market go next week, August 12-16?
Based on this chart and a couple of others that we didn't have time to prepare, we would guess that the SPX would go sideways to up. If there is a close and open over 950, the upper Bollinger band may have been violated and the movement would be down the following week, August 19-23. If there is no violation, the SPX could hug the upper Bollinger band upward to as high as 1,000. If 1,000 is reached, the Ultimate Oscillator would register above 75. That would be a strong sell signal. The Ultimate Oscillator does not often register strong buy or sell signals. So a strong sell signal by the Ultimate Oscillator would be significant.

Price, Open-High-Low-Close chart.
Golden cross.
Japanese call the point at which the fast line crosses over the slow line upwards, a golden cross. It's a buy signal.
Dead cross.
Japanese call the point at which the fast line crosses over the slow line downwards, a dead cross. It's a sell signal

Slow stochastic chart. Gives a clear short term signal only when both of the lines are between 80 and 100 for a down signal or between 0 and 20 for an up signal.

Ultimate Oscillator chart. Gives clear predictive sell signal if it goes above 75. Gives clear buy signal if it goes below 25.

Bollinger Bands. Give a trend reversal signal when the bands are violated by open and close lying outside the bands.

Buy and sell signals tell you when to buy and sell. Buy and sell signals must be clear to be useful. These clear signals do not appear every day.

What would be an easy chart to predict future movement? It can't get much easier than the chart below. If you ever see such a chart in the future, you will know what to do.