Charting (Technical Analysis) is like reading footsteps. It doesn’t only reveal the past. It gives clues about the likely direction in the near term future. It provides an understanding of likely future behavior, based on deeply ingrained psychological biases and personal incentives. When elephants dance, they leave traces. When institutions buy, they can’t hide their hands. Here is what I said about the subject in my chapter of The StockTwits Edge:
Financial markets move in cycles that are defined by institutional capital
allocation. When institutions buy or sell, they do so in volume and leave clear
traces for the experienced eye…
The bulk of the directional market moves tend to happen in just 10 – 15% of
the trading days. The rest is nothing more than noise in a range. I am looking for
the event that signals the beginning of a powerful, new trend. How does this
signal look like? Simply said – it is high-volume price expansion:
High volume (at least 3 times the 20-day average daily volume);
Price expansion (at least 2 times the average true range for the last 20
days and a minimum of a 10% move)…
Such combination of price and volume action guarantees institutional
involvement. My logic is simple – when institutions buy, they leave traces. They
are heavy, slow buyers; therefore I have enough time to enter and exit as they
build their position.
BTW, Peter Brandt has a good post on the subject and as usual, his perspective is worth perusing.