Chart analysis has become more popular than ever.One of the reasons for that is the availability of highly sophisticated, yet inexpensive, charting software.The average trader today has greater computer power than major institutions had just a couple of decades ago.Another reason for the popularity of harting is the Internet. Easy access to Internet charting has produced a great democratization of technical information.Anyone can log onto the Internet today and see a dazzling array of visual market information.Much of that information is free or available at very low cost. Another revolutionary development for traders is the availability of live market data.With the increased speed of market trends in recent years, and the popularity of short-term trading methods, easy access to live market data has become an indispensable weapon in the hands of technically oriented traders. Day-traders live and die with that minute-to-minute price data. And, it goes without saying, that the ability to spot and profit from those short-term market swings is one of the strong points of chart analysis. Sector rotation has been especially important in recent years. More than ever, it’s important to be in the right sectors at the right time. During the second half of 1999, technology was the place to be and that was reflected in enormous gains in the
Nasdaq market. Biotech and high-tech stocks were the clear market leaders. If you were in those groups,you did great. If you were anywhere else, you probably lost money
During the spring of 2000,however, a sharp sell off of biotech and technology stocks pushed the Nasdaq into a steep correction and caused a sudden rotation into previously ignored sectors of the blue chip market—like drugs, financials, and basic industry stocks—as money moved out of “new economy” stocks into “old economy”stocks.While the fundamental reasons for those sudden shifts in trend weren’t clear at the time, they were easily spotted on the charts by traders who had access to live market information and knew how to chart and interpret it correctly. That last point is especially important because having access to charts and data is only helpful if the trader knows what to do with them.And that’s the purpose of this booklet. It will introduce to you the more important aspects of chart analysis. But that’s only the start.The Investing Resources Guide at the end of the booklet will point you toward places where you can continue
your technical studies and start taking advantage of that valuable new knowledge. Charts can be used by themselves or in conjunction with fundamental analysis. Charts can be used to time entry and exit points by themselves or in the implementation of fundamental strategies. Charts can also be used as an alerting device to warn the trader that something may be changing in a market’s underlying fundamentals.Whichever way you choose to employ them, charts can be an extremely valuable tool if you know how to use them.This booklet is a good place to start learning how.
John J. Murphy
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