Rant mode on:
Having been a technical analysis and chart studier from my beginnings in trading/investing, I studied so many books, from Weinstein to Elder and everything in between. The whole basis of technical analysis (TA) is that the charts reflect sentiment/emotion/attitudes, both positive and negative, and that the sentiments of the markets follow somewhat predictable patterns, which are the charts.
However, as I have aged, and watched on as algorithmic trading bots have taken over the entire markets, I have come to realise a few things that have now made me highly skeptical of TA.
1. There is NO sentiment in the markets any more - decisions are made by algorithms, not people. A software switch is flicked, and the algo does its thing, either long or short depending on the settings. Yes, I understand that algos are written by humans, and that the parameters are set by humans, but most algos are set to mask what they do, which in turn is reflected in the charts not showing anything that reflects sentiment at all.
2. The old assumption that a run of short selling is almost always followed by a short-covering run up almost never happens now. Shorts are covered off-market, or via thousands of tiny trades that don't move the share price much.
3. One of Elder's (and my) favourite signals is a divergence - either bullish or bearish - between the MACD and the price charts. Those used to be highly reliable signals to buy or sell, and a large majority of those predictions came to fruition. But now - hardly ever. Again, because the underlying assumption that the charts reflect market sentiment is wrong. There is NO sentiment any more. It is all decided by algos, by front-running orders, by stacking buy or sell sides, by co-locating trading computers with the market's own computers (eg the ASX) in order to gain a couple of microseconds advantage that will allow the trading computers to change and set things like the closing price for the day.
It has been that way now for several years, but is getting worse. I look at charts every day (still do) but what I see is NOT the reasonably predictable behaviour reflected in well-known chart patterns. It is almost random. Stan Weinstein would turn in his grave trying to make sense of charts these days. Support and resistance lines, gap-filling, trend breakdowns, etc - none of these work any more in predicting the likelihood of future price movements like they used to do. Things like head-and-shoulders (in either direction), pennants, "break-outs", etc - all now pretty much useless. It's sad, as charting used to be a lot of fun with good payoffs if one got it right. Now, trading is just swapping bits of code for stock symbols, back and forth, in an artificial environment, that has absolutely nothing to do with investing, company ownership as a shareholder, and which produces nothing for the good of humankind. It is a completely contrived activity, where the only ones pretty much guaranteed to win more than they lose are the big players and their algorithms running on their co-located computers. For the bit players at home, TA has become obsolete.
End of rant
(20min delay)