Go back to analytical foundations when present is crazy

The recent stock market sell-off and panic gave a lot of traders and analysts a stiff slap in the face, forcing them to examine whether they saw signs of it coming.

It also gave seasoned traders and analysts a chance to step back and think about their core, foundational markets beliefs and to review the fundamentals of what they know.

I found myself in the basement, pulling mid-2000s technical analysis books and Canadian Securities Institute texts out of boxes so I could refresh myself on the chart patterns and market divergences that might be underlying the wild swings the markets were making. I follow lots of charts, but don’t often go back and review what I once spent a lot of time learning.

It made me wonder how the pros refresh themselves on the foundations of technical analysis. Tech analysis is a lot more demanding on practitioners than supply and demand analysis, and I asked a few technical analysts how they get back to the basics after months or years of being caught in the hurly-burly of the markets.

“It happens once or twice a year,” said Harold Davis of Prairie Crop Charts, which produces and comments upon price charts.

Something provokes memories of chart patterns seen in his foundational texts, and he pulls them off his bookshelf. For him, the Robert D. Edwards/John Magee classic, Technical Analysis of Stock Trends and William Jiler’s and Martin Pring’s works offer core understandings that still apply decades after their first publication.

David Derwin of P.I. Financial told me that he goes back to Thomas Bulkowski’s Encyclopedia of Chart Patterns, which he used to build his knowledge when he was getting into technical analysis and needed something to clearly lay out the many varieties of chart analysis.

“Try to keep it simple and straightforward when you deal with the markets,” said Derwin.

Having a basic explanation of the chief technical analysis structures and approaches helps make sorting through complex and volatile markets less challenging.

“They work not every time, but over time,” Derwin noted.

One of the best testaments to a crucial foundational text came from DTN’s Darin Newsom. I had interviewed him for a story and he mentioned John J. Murphy’s Intermarket Technical Analysis as one of the books that he had used decades ago to train himself in technical analysis.

That spurred me to pop up the Amazon app and order a copy. I tweeted him about what I’d done, and he immediately tweeted back, from an airport, a photograph of his carry-on bag. What did it contain? A scuffed-up copy of Intermarket Technical Analysis.

The market’s structure today might seem shaky and wobbly, with a lot of noise, dust and confusion, but that makes this a perfect time to dig down and check out the foundations. If you learned this stuff once, it’s worth digging it out to see if it still supports your understanding.

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