Friday, September 19, 2014

Technical Analysis: The Changing Landscape


Most Technical Analysis books were written in the 1970s -1990s which, by technology standards, is a very long time ago.  As technology has reshaped the Market Participant Cycle and how different groups access and trade or invest in the financial markets, this invariably has altered technical patterns.

Unfortunately most retail traders are still using the older books and reference manuals when they first start learning technical analysis.  Years later, often 20 years or more, these retail traders are oblivious to the technical pattern changes as they are simply not aware of them, or are so focused on searching for the patterns they were accustomed to finding in abundance, that they skip over the new technical patterns that expose pre-momentum and pre-velocity action before big price moves.

This can cause late entries, whipsaw trades, and lower profitability. Many retail traders grumble about lower profits and more difficulty finding great stocks to trade. They blame it on what they have been told is happening in the markets: volumes are declining for the big exchanges, Dark Pools are taking all the liquidity, and HFTs are causing all the volatility.  Most of this information has been inaccurately reported and leads to misinformation.

Retail traders, especially those who have been in the market for decades and learned the older style of technical analysis, are now at an extreme disadvantage.  They have spent a lot of money and time learning technical patterns that are slowly but steadily disappearing or are altering sufficiently to be unrecognizable.

A prime example is the huge decline in true Head and Shoulders and Inverse Head and Shoulders Patterns.

H&S tops and Inverse H&S bottoms used to be so common that everyone knew these patterns and could quickly act on them. This created sufficient liquidity for strong momentum runs up and down, depending upon the pattern.

Unfortunately, these have been replaced by platforms, stairsteps, and velocity tops and velocity bottoms.  Rarely do you find a true H&S pattern and often these are either distorted and harder to recognize or fail to complete. Instead of indicating a top, Head and Shoulders topping patterns now mostly indicate a smaller-magnitude correction that adjusts out before the pattern can break though the neckline.  Or the head is so minor that there is insufficient downside point gain potential to create a true down-trend.  Mostly what would have developed into an H&S pattern ends up becoming a trading range.  


Why have the older-style technical patterns changed or slowly disappeared?

The Market Participant Groups have expanded. Where once there were only 3 Market Participant Groups to create the Dow Theory Cycle, there are now 9 Market Participant Groups. This massive market structure change inevitably shows up in charts and technical patterns.

With each new group, and their own unique technical footprint, the landscape of technical patterns is changing. What once was will not return.  Learning these newer patterns is critical to improving trading success in today’s market.

The market structure is continuing to change at an unprecedented pace and this will continue to alter known technical patterns and create new patterns as technology alters how the institutions, Buy Side, Sell Side, HFTs, Hedge Funds, Small Funds, retail crowd, and others trade stocks, options, and derivatives.

Check out this video on Relational Analysis for understanding the modern market structure at play in trading activity today.

Trade Wisely,

Martha Stokes CMT

Chartered Market Technician
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor & Developer of TechniTrader Stock Market Courses
MetaStock® Partner

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