The Resurrection of Technical Trading?

During the bull slaughter of recent months I heard more than one CNBC pundit describe what happened as "the death of technical trading". As a rehabilitating chart head I can attest that a lot of filters and patterns that worked well for me in recent years didn't work very well during November and December of 2007 and then didn't work at all during the first couple of months of 2008. The scary truth was that stocks were falling through support level after support level without a clue as to when it would end.

The bounce in the market we've seen the past few weeks could simply be a false alarm. It could be a soon-to-end, dead cat bounce of a bear market rally that we're witnessing. That said, I am currently witnessing a bit of a return to normalcy in a lot of charts. It's not about the fact that stocks have been rising since mid-March. Rather, it is about the return of a little bit of predictability in charts. Moving averages and support/resistance levels seem like they are starting to matter somewhat once again.

Although I am not a full time swing trader any longer, a review of the IBD 100 has me considering a swing trade or two. A staple of my swing trading for years was to trade IBD 100 stocks on pullbacks to their 50 day moving averages. As I scan the charts of the 100 today I am seeing some opportunities to once again employ this strategy. Please note that a tight stop loss is a must when I use this approach. Heck, I might even employ a call spread to limit my downside at this point.

My current policy is that I do not share my trades out of fear of anyone foolishly following my lead and losing money. In the interest of sharing the approach rather than the specific trade I have annotated the chart of a stock I will NOT be buying. The chart illustrates my point but is not among my favorite IBD 100 charts at the moment.

Click below for a low budget graphic of LKQX's chart. (The text has an unintentionally Christmassy color scheme!):

The long and short of it is that moving averages as well as support and resistance levels can be very useful in trading. Such chart goodies can often predict a good swing trade or tell you a good time to enter or exit a longer term trade. However, the painful lesson a lot of us chart heads re-learned in recent months was to treat the chart as just a piece of the puzzle rather than as the whole story. You should absolutely study the chart of any stock you buy. Just as important, however, is putting the chart into perspective by studying the quality of the underlying company, the strength of the overall market, and the strength of the specific sector in which the stock lives.

Yes, every semi-experienced trader is well aware of the truth of my previous sentence. That said, as a bruised and bloody technical trader with a formerly stubborn bullish streak I can tell you that when a market trends in one direction for a long period of time it can make a trader very lazy. I'm personally committed to not letting that happen again. In the long run, I am confident that living through the past few months will make all of us better traders for having been there.