The first thing he did was ask what would happen if the price of a stock kept hitting the bottom support line? That is it hits the bottom support line, then goes up, then hits the bottom support line and does this repeatedly. The correct answer was the price of the stock would fall below the bottom support line because of the repeated hitting of the support line.
He said that technical analysis is all about group behavior. (He is the second person to say this at this show. I must admit that I always thought that technical analysis only works because investors were emotional. I also believe that economic theories that do not take into consideration the emotional aspect of people, do not work.) Chin then quoted Sun Tzu from the Art of War. The quote was “understand yourself and understand your enemies and you will win every battle”.
He said the best tool for reading the collective emotions of the market participants is by candlestick charting. See the picture at top. When you have a long upper shadow, it is because the bulls pushed it up but the bears dominated and the stock closed lower. When you have a long lower shadow, the opposite has happened and it is very bullish. Use the RSI (relative strength index) to show how excitable the crowd is. Does the RSI stay in the 70 to 30 band? You are dealing with a tame crowd. Does the RSI breach the 70 and 30 lines a lot? You have a very excitable crowd.
This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.
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