The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
The Visual Investor: How to Spot Market Trends
03/01/2009 1:04 pm EST
I was very pleased when I heard that John Murphy had finished the second edition of his book The Visual Investor: How to Spot Market Trends. I had read the original soon after it was released in 1996, and this second edition made even more of an impression. I should first note that I have known John for over 20 years, as we have traveled overseas together, taught a few classes together, and I even wrote a small section in one of his previous books. That said, one of John’s great gifts is his ability to explain technical analysis in a simple enough fashion so that even a complete novice can understand. He accomplished this regularly while at CNBC, and also in both editions of The Visual Investor. This is not easy to accomplish, and as John points out in the foreword, just the mention of technical analysis intimidates many, and that is why he prefers to refer to it as “visual analysis.”
The book is divided into four sections, but regardless of your level of experience in the markets or with technical analysis, you should not skip the Introduction, which is the title of the first section. In it, John covers the essential concepts of drawing trend lines, identifying support and resistance, and provides an extensive series of well-annotated charts. The concepts are covered in a succinct manner, often with provocative titles such as “Chartists Are Cheaters,” or “Role Reversals.” John explains the different types of charts, chart scaling, why volume is important, chart formations, and measuring techniques. I would be willing to bet that after reading this section, many experienced traders will ask themselves why they are making things so complex.
In the second section, John looks at indicators, starting with moving averages and then moving on to many of the popular oscillators that many traders and investors now use. He builds on the interpretation of these indicators one step at a time, going from a single moving average to dual moving averages, then looking at indicators just in terms of overbought or oversold. Indicators are then covered in more depth, as he focuses in on a few of the best known, such as the RSI, stochastics, MACD, and the ADX. Some of the topics that he covers are divergence analysis, how to interpret signals from different time frame charts, and how indicators can be combined.
Most of you have heard about intermarket analysis, but many of you are probably not aware that this concept was first discussed, in-depth, by John in his 1991 book, Intermarket Technical Analysis. This book was later updated in 2004, and many of the trends that John discussed then have been impacting the markets for the past two years. The long-term charts of the dollar and commodities, bonds and stocks, along with crude oil and the S&P will now seem especially interesting. For most, this type of analysis does not need to be done on a daily basis, but on a weekly or monthly basis, it will help keep you in the major trends such as long bonds over stocks during the past year. In John’s chapter titled “Market Breadth,” he starts off discussing the importance of the advance/decline data then moves into an explanation of why sector analysis is critical and how the weak performance of several sectors in 2007 added further evidence that the market was topping. In addition, he covers several other measures of the stock market’s health including the Dow Theory and the NYSE bullish percentages. The last chapter in the section deals with sector rotation, and once again, John’s charts (all from Stockcharts.com, of which he is a co-owner) clearly illustrate the rotation between different sectors.
In the last section of the book, John breaks the market down and looks in terms of sectors and industry groups. The methods taught in the prior chapters are then applied to these market components, and John explains how market carpets and performance charts can help you keep your money in the sector that is doing the best. Many charts are provided, and in one example, the comparison of the Amex Natural Gas Index to the Philadelphia Semiconductor Index between June 2007 and 2008, he notes that during this period “ the natural gas stocks rose 66 percent while the semiconductors lost 17 percent.” He also applies his technical methods to both open and closed end funds while continuing to stress the importance of keeping it simple. He covers many of the different fund types to demonstrate how well they track from a technical standpoint. Of course, John also devotes a chapter to ETFs, which have become so popular over the past few years. Many types are covered, including the inverse, leveraged, currency, and commodity ETFs, as John believes these are just another part of “an investors arsenal of trading vehicles.”
The concluding chapter is where John shares his observations about how visual investing leads fundamental analysis, and how the charts forecast the housing top and the bear market, making a compelling case as to why you need visual analysis to survive and prosper in the investment markets. There are also three appendices that contain his suggestions for getting started, along with an introduction to candlestick and point and figure charting. Though John told me that this might be his last book, I certainly hope not, and would recommend this latest offering for traders of all levels.
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