3. Support and Resistance | Summary and Q&A

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February 23, 2017
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Elearnmarkets by StockEdge
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3. Support and Resistance

TL;DR

Technical analysis in stock trading is an art rather than a science, and it has weaknesses such as subjectivity and disregarding fundamental factors. Dow Theory's principles include identifying primary trends for buying and selling opportunities.

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Key Insights

  • 🫵 Technical analysis is subjective and can yield different views among analysts.
  • 🎏 It often lags behind actual price movements, making it less effective for timing trades.
  • 🧑‍🏭 Technical analysis focuses solely on price data and does not consider fundamental factors.
  • 📈 Dow Theory emphasizes identifying primary trends of stocks for trading decisions.
  • 👋 A primary uptrend indicates a good buying opportunity, while a downtrend suggests potential for shorting.
  • 📰 Stocks in a downtrend for a year or more may have negative news or weak performance.
  • 🍰 Short correcting in an uptrend can be a favorable buying opportunity.

Transcript

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Questions & Answers

Q: Why is technical analysis considered an art and not a science?

Technical analysis involves subjective interpretation of charts and patterns, leading to different views among analysts. It lacks a precise formula or set rules.

Q: What is the weakness of technical analysis in terms of timing?

Technical analysis is often criticized for predicting price movements only after they have already happened, making it less effective in terms of timing entry and exit points.

Q: How does technical analysis overlook fundamental factors?

Technical analysis solely evaluates price trends and patterns, neglecting important fundamental factors like a company's balance sheet and profit and loss statement.

Q: What is the primary trend in Dow Theory and how does it impact trading decisions?

The primary trend in Dow Theory refers to a price movement in place for one year or more. Trading decisions are influenced by whether a stock is in an uptrend (favorable for buying) or a downtrend (favorable for shorting).

Q: Why is a stock in a primary downtrend suitable for shorting?

A stock in a primary downtrend for a year or more indicates negative news or unfavorable market conditions. Shorting such a stock during a bounce-back can be a profitable strategy.

Summary & Key Takeaways

  • Technical analysis is not a precise science and can vary among analysts, leading to different views on stock performance.

  • Technical analysis often predicts price movements after an event has already occurred, making it less proactive.

  • Technical analysis focuses solely on price movements and neglects fundamental factors like company financials.

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