A Critical Misinterpretation of Technical Analysis

01/29/2016 6:00 am EST

Focus: STRATEGIES

Gregory Harmon, CMT

Founder and President, Dragonfly Capital Management

Greg Harmon, of Dragonfly Capital, points out that while is often thought that a change of character means a reversal, this is actually a common misinterpretation of technical analysis and why.

One concept in technical analysis that often misinterpreted is that of a change of character. This is meant to be an indication that what has been happening is now changing. The misinterpretation is that it is often thought that a change of character means a reversal. In fact, that would be a premature assessment. And that is a very large misinterpretation because technical analysis is built on confirmation of change. So interpreting a change of character as a reversal is critical mistake.

The chart below of the recent price action in the SPDR S&P 500 (SPY) can be helpful in explaining the distinction. The chart shows the activity going back to November. The SPY was in a channel drifting slowly downward until the end of the year. At that point it accelerated lower along the dotted trend line.

chart
Click to Enlarge

The change of character manifested itself at the end of last week. To read the entire article click here…

By Greg Harmon of Dragonfly Capital

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