“Can I be honest with you?”

I hate it when people ask me that. As if I’m going to respond, “No, lie to me.”

But the truth is, it’s usually a preface that suggests we’re not going to want to hear what we’re about to be told.

So… can I be honest with you?

I have no idea what’s going to happen in stock markets or bond markets this week.

We are at a critical juncture for both stocks and bonds, and this week might be huge.

[ad#Google Adsense 336×280-IA]This past week was ugly, as in really ugly. But, as ugly as it was, U.S. equities are hanging on (by a thread) to their upward bias. As far as the rest of the world, it’s pretty much the same; however, there are cracks everywhere.

From a technical perspective, we are in a very dangerous position. If we don’t see a good rally early in the week, we might be in trouble. If we see a hard sell-off before Thursday, we could be on our way to testing this year’s lows, or breaking them.

Sorry, but I feel I have to digress here for a moment. This is for all of you who just sighed when you read the word “technical” and thought “technical analysis, that’s like reading tea leaves.” Can I be honest? If you think that, you are an idiot. Sorry, just being honest.

Technical analysis is not a matter of random hash marks on a graph accompanied by lines with circles and arrows. Where do you think those marks on that graph came from?

Technical analysis is all about psychology. It’s a reflection of investor activity and the mindset that accompanies it.

The marks on a bar graph reflect the high and low prices of that day. There can also be little marks on each vertical line that show the opening price and the closing price, too. When you string a lot of daily prices together on a graph, it is exactly what happened when investors and traders (we’re all traders now, I’m just appeasing you out there who don’t know it, or are fighting it) bought and sold whatever instrument you’re looking at.

What you may not realize is that things like “support” and “resistance” (to name the most often cited technical analysis tools, though there are many other excellent ones) are places where traders made actual decisions with their money.

A support line, for example, reflects where a stock, an index, a commodity (it doesn’t matter) experienced buying interest. The instrument was going down and stopped declining, because buyers stepped in, and selling abated. A resistance line would reflect the opposite.

That means that people actually took a position at that juncture.

In the case of support, buyers stepped in and maybe short sellers stepped to the sidelines. Then the instrument rises in price. Maybe it comes back to that support level a few times (the more times an instrument touches its support or resistance levels, the more important those levels become) and each time buyers again step in the instrument goes higher, again.

If you think that technical analysis is mumbo-jumbo, think again.

— Shah Gilani

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Source:  Money Morning