Technical Analysis - The Highway Journey Concept

Jan 06

Technical Analysis – The Highway Journey Concept

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Many fundamental analysts discredit technical analysis as a financial market analysis tool. Some of the claims against technical analysis come from celebrity investors and their strong opinions have caused many newcomers to discount the credibility of this wonder forecasting and market timing tool. I am going to share one powerful and yet basic concept of technical analysis. I called this concept "The Highway Journey."

Let me begin by giving the analogy of the stock price movement as the highway. There are 3 important characteristics to remember here.

There is a prevailing travelling direction
There are exit points from the highway to other routes
There is a final stop at the destination

Prevailing Travelling Direction – Stock Market Primary Trend Direction

Bring a compass with you and drive along the highway and you will see what I mean. As you travel, the compass might change from north, east, south and west even though you seem to be travelling on a straight path. Stock market doesn’t go up or go down on a straight line. It trends in a primary direction of uptrend (bullish), downtrend (bearish) or correction (sideway movement). Just like highways that don’t really move in straight paths, the stock prices also move like waves. Remember, they are not directionless.

Highway Exit Points – Stock Market Potential Trend Reversal Points

When you travel along the highway, you just can’t reverse your car as you wish to. You have to exit at the proper exit point to change your route. Stock market or any financial investment vehicles like commodities and forex are the same as well. When they are trending, they will keep moving in the prevailing direction. When they reach the exit points, they could and usually either form corrective sideways movement or reverse its trend. Most technical analysis critics use or misuse this point to discredit this market forecasting tool. As you reach the highway exit point, you could stop for a moment at the resting area before continuing your journey, or you could take the exit point and change your route, or you could just ignore the exit point and keep moving. The same goes to the stock market. The exit points of the stock market highway or what we called as the "potential trend reversal point" are basically identified as support and resistance levels. For Gann or Fibonacci traders, the exit points could be time zone. This is a little advanced so I will just keep it brief at the moment. Again, the stock market does not need to obey every potential trend reversal point. So, does the stock market always reverse its trend at Fibonacci 61.8% retracement level? I believe that you get my point here.

Highway Final Stop – Stock Market Peak and Bottom

Stock market cannot forever go up just like good stories must come to an end eventually. The final destination is likening as the stock market top and bottom. One million dollar question here, can we know beforehand the stock market peak and bottom? You will be surprise as the answer is a yes. Just as you know and chart your highway destination, so the stock market peak and bottom can be charted out in advance. There are many tools available and we have to learn how to use it just like a navigating tool. Market analysis techniques like Gann Angles and Fibonacci Projection are just some of them.

As you can see that technical analysis and its various financial markets analysis tools are navigation compass in this jungle of financial markets. The beauty of it is that they work the same whether in stock equities, futures derivatives, commodities or forex. Its uses does not limit to whether the chart is a daily end of day chart or 5 minutes intraday chart. So, remember the highway concept and it will save you unnecessary monetary losses when trading.

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