Chart Patterns Show All
A Stock’s Chart Pattern Reflects What is Known
When determining their buy and sell points or devising their tactical plan, many technical traders consider the news to be only a distraction. Why? Because all that is known by the market about a company is believed to be reflected in the stock’s chart pattern. What is already “known” by the market (the sum of all knowledge that the market has “heard” or “seen”) usually exceeds any single bit of news or any single analyst report that is likely to be released. Hence the old Wall Street saying, “Buy on the rumor, sell on the news.” It takes an unexpected item or extreme event to cause a shift in a stock’s chart-pattern development..
Here is how it works. If you have a brother who works at XYZ Company and your brother is excited about a new product under development, you will know about it. If you think XYZ Company is going to have a blockbuster on its hands you will probably buy some of its stock.
The suppliers for XYZ Company know that the company is ramping up requests for additional or different types of supplies to produce the new product. This causes speculation on the part of the supplier’s employees, some of whom probably know somebody associated with XYZ. The employees of those suppliers and their relatives also now know that something is in the works at XYZ Company.
Lesser known analysts may have stated their opinions without those opinions reaching the media in any big way, because those analysts don’t yet have the clout that comes with having a big name. Yet they do have a constituency and some people have acted on those reports.
There are also major analysts and other watchers of XYZ Company who have access to and regularly talk with the suppliers of XYZ Company, and they do so to get an inside track on what is happening with XYZ Company and with its competitors and suppliers. By monitoring the flow and nature of supplies, it is possible to get some idea about what the product is and how big the marketing push will be. Friends and relatives of these analysts and other watchers of XYZ Company may also act on what they have heard by buying stock in XYZ Company.
The competitors of XYZ Company know the source of their greatest competition and whether or not that competition is robust and likely to remain strong. Competitors also have their “moles” at XYZ who keep them abreast of new developments at the firm. The families and friends of those competitors may also act on what they have heard by buying stock.
All this information is being spread around well BEFORE any announcements are made or news of any breakthrough is available to the public. In response to all this information, the stock’s chart pattern is therefore developing a setup configuration in advance of the news. Now there are thousands of traders and other observers who monitor the stock of XYZ Company, and they notice when buying activity in the stock increases and when momentum begins to build. Traders who know how to identify setup patterns will act on the basis of a trigger event and not because a news item has been released. An example of this would be the occasion on which the author mentioned to one of our best stockdisciplines.com traders that there was a fresh news item that might affect a particular trade. The trader asked me not to say what it was or even talk about the news. The reason given was that it would only muddy the issues or add confusion to the decision-making process. Our traders will buy an amount of stock in XYZ Company based on how compelling the chart pattern seems to be.
Technical “purists” do not want to know about the news. They don’t even need to know the name of the company or what business it is in. All they want is a good chart. For them, the chart tells the whole story. A current chart is a picture of everything that is known at the time. Just as a physician can use an EKG to aid his diagnosis of a patient’s condition, so a technician can use what he sees in a stock’s chart to understand what is happening to the stock and plan his course of action accordingly.