Candlestick, head-and-shoulders, ascending triangle: If these phrases aren't familiar to you, you're missing out on major profit opportunities. Clive Maund, technical trader and editor of CliveMaund.com, shares the tricks of his trade in this interview with The Energy Report. Find out how to recognize potential price swings in commodities and stocks, and discover junior energy companies and ETFs with charts that scream "upside!"
The Energy Report: Energy prices are very sensitive to international events, especially conflicts in the Middle East. Do your charts factor in the periodic crises that impact oil and gas prices as buy and sell moments? How do you factor in inflation and interest rate movements into your calculations about which energy juniors look like good buys at any given time?
Clive Maund: The charts do factor in periodic crises that impact oil and gas prices as buy and sell moments, but often in a contrary way. The trick is to gauge when a crisis is at its moment of greatest tension, and while this is not at all easy, the charts can often be a great help in defining such a moment. I will give you an example using a recent call on CliveMaund.com, where the top in oil was pinpointed a day after its occurrence. Some readers may remember an old saying used on the London market many years ago, "Buy on a strike." This refers to a strike by labor, not an oil strike. The underlying psychology of this was that the time of maximum tension and uncertainty, which was when labor unions called the workers out on strike, was the best time to buy stocks, because they would have been falling in anticipation of this, and as tensions later eased as the situation headed to resolution, they would rise again. So it is with conflict and tension situations in the Middle East and their impact on the oil markets.
Some weeks ago, before the surprise announcement by Putin and Syria that chemical weapons would be turned over to international regulatory bodies, the oil price suddenly put in a large prominent "shooting star" candlestick as it made a new high for its uptrend, which we read correctly as a topping signal and a sign that the crisis was about to ease. Once it did, as we know, the oil price dropped away. The fact that it put in such a signal before the announcement is an indication that powerful, well-connected people knew that such an announcement was imminent, and traded on it to their advantage, as is so often the case. We observed their boot prints in the sand and judged the situation accordingly—and correctly, as it turned out.
Inflation is not much of a consideration, as it is built into the prices of just about everything. It really only needs to be taken into account when you are looking at long-term charts. For example, if a stock is priced at $30, and it was at the same price 10 years ago, it is clearly worth less in real terms now than it was back then. With regard to junior energy stocks, I do not pay much attention to inflation in making picks, because as I said above, it is a background factor that is already built into their prices. What matters with interest rates is not so much their actual level but their direction—their trend, and their rate of change. Right now we are at a dangerous juncture, with the Fed fumbling its way forward, trying to keep interest rates low and retain what shreds of credibility it has left.
TER: Please explain how quants like yourself use chart patterns to analyze a stock's trajectory over time. Can you talk about the meaning of some of the basic chart movement metaphors, such as "head and shoulders" and "candlestick"?
CM: Most of the technical indicators that we use to identify good entry or exit points for stocks are based on plain common sense. Thus, a stock that has been sold into the ground, and has then formed a base pattern, is likely to start a new uptrend and recover as the company's fundamental situation improves. On the other hand, an overvalued stock that is racing away to the upside and way ahead of its moving averages is much more risky and prone to correct.
Support and resistance zones on a chart are related to "congestion zones" where a large amount of stock has traded close to a particular price in the past. The way it works is this: After a run-up in a stock, a large number of traders take profits, believing the stock has done its thing and could reverse. Then, to their chagrin, it breaks out and rallies to a new high. Having missed the move, they resolve to buy it back if it should come back near to the price at which they sold. Their buying potential puts a floor under the price on the next dip, providing support, which can be identified on charts in advance and utilized for timing purchases. It works the same in the other direction: Traders buy a stock in a trading range, expecting it to break out upside and continue higher, but it does the opposite and breaks down. Rattled by this, they resolve to "get out even" if it should rally near the price at which they bought it. Their selling potential caps the next rally, creating resistance, which again can be identified and used for timing purposes by the technical trader.
It usually takes time for a major uptrend in a stock to reverse into a major downtrend. Think of a stock as a heavy locomotive that needs time to stop and reverse direction. This is why after major uptrends, top areas form, which allow time for the so-called smart money to offload their holdings to the "dumb money." The duration of the top area is of course also related to the fact that a company's fortune does not usually change from improving to deteriorating overnight; it is generally a slow process. The smart money uses the cover of glowing news reports and company statements to offload their holdings at top dollar, aware that the good times are going to come to an end.