How does this chart look to you?

What a strong uptrend, increasing volume, breakout above 2.00 resistance, MA cross… Right?

Right. Only one problem. Just a week later, this stock (doesn’t matter what it is) was trading at half of what you see in this chart. And it was no surprise.

Now, I myself use charts all the time. I believe in technical analysis. But what I hate seeing is, people who think they can chart anything (3x ETFs???), trade ANY stock over ANY time period using purely technical analysis.

I’ve been bashing Harry Boxer on my Twitter page recently. He is supposed to be a reputable “stock picker” in general. He also has a paid service. The problem is, this guy previously recommended stocks like ABIO and ENCO for swing trades just based on their technicals, ignoring how terrible the companies actually are and not surprisingly, stocks collapsed big time soon after the recommendation.

Recently he picked another one, JSDA. Now I know as much as any other guy that this stock has a bullish chart and you should be all over it IF there was no significant risk of dropping 30% as soon as tomorrow. As you can see in firstadopter’s excellent posts, the company has no cash, huge cash burn and has been losing money consistently for years and years. The reason for recent run up is complete fluff and it has to end either with a highly dilutive stock offering or bankruptcy.

Anyone who’s been in the market for a little while knows that hype always dies and when it does, it creates many unsuspecting bagholders. I just can’t accept the fact that a guy who runs a paid service for years can intentionally or unintentionally (???) neglect this fact, look at some magical indicators and pick a stock. As if all stocks are the same, as if all stocks follow the same rules.

Anyway, technical trading is fine in most cases, but there are situations where it hides the ugly truth and that truth can be very costly. I think it’s very important to have a hybrid approach of fundamental and technical trading. In general, if you’re a technical trader I believe you should:

- Know the company you’re trading and the risks involved. You may think your timeframe is too short where fundamentals won’t matter. But, what if it’s your unlucky day and the stock you’re trading is halted during those 15 minutes you were planning to be in?

- Be aware that technicals, contrary to some might say, may paint a much different picture than what is about to come. This is especially true with smallcaps where so much shadiness abounds.

- Know how to read SEC filings, balance sheets etc. Do the math!

- Don’t blindly chase the hype. Hype is a game of musical chairs. Hype is gambling.

- Be very reluctant holding overnight if you see some red flags. Bad things happen at night.

- Don’t over-complicate things as some technical fanatics do. The more complex your indicators are, the more confused you will get. Stick with a few simple ones.

- Remember that no matter how your chart looks, you can’t ignore world events, overall market condition and the sector you’re trading. They will affect your stock sooner or later. 

- Once more, do the math. It’s not really hard.

PS: The same idea is also true for “Pure Fundamental” traders by the way, but that’s the subject of another post.