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.
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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
