On a related note - I've received a few emails asking about how to learn about technical analysis or what books to read. I am sure there are some excellent references but essentially everything I've learned has been picked up in drips and drabs over the years from this place or that on the internet. Certainly if you google technical analysis you can begin discovering many resources and my best advice to learn is just to read blogs and websites that utilize it. Blogs were not around when I started investing (we had to walk to the computer uphill, both ways, in the snow, barefoot....) so it's a great avenue to learn that has not always been available.
I spent the first 5 or so years in equities completely oblivious to "TA" and when I look back now at how I used to invest it scares me to death. "If only I knew what I did not know". Then again we were all geniuses in 1999 so why did I need to bother to learn about "tea leaves". I will also emphasize in college course terms I use Technical Analysis 101... there are countless "indicators" and many investors have incredibly sophisticated systems. (TA 301, TA 401 courses) That doesn't mean TA 301, or 401 is better - it just means there are many far more extensive methods than what I use. There is also an entire class of traders out there (some institutional) who could care less what a company does, if it makes money, or any of those type of factors - all they use is the stock symbol and their charts. We are a hybrid of fundamentals and technicals; there is a reason we buy these companies but if the charts go against us, we are not going to lose massive amounts of our capital to prove a fundamental point. I read a lot of mutual fund manager interviews to see what the "competition" does, and I am aghast to see almost no one use technical analysis... frankly in a computer dominated market, I think its importance is growing by the week. [Aug 24, 2009: John Hancock Technical Opportunities Fund Becomes 2nd Technical Analysis Based Mutual Fund to Launch] The more tools on your tool belt... the better.
Technical analysts seek to identify price patterns and trends in financial markets and attempt to exploit those patterns. While technicians use various methods and tools, the study of price charts is primary.
Technicians especially search for archetypal patterns, such as the well-known head and shoulders or double top reversal patterns, study indicators such as moving averages, and look for forms such as lines of support, resistance, channels, and more obscure formations such as flags, pennants or balance days.
On to the Barron's viewpoint:
(I) On Tuesday, the Nasdaq made two bearish moves. The first was a drop under last week's small trading range (see Chart 1). The more important was the drop under the rising trendline drawn from the March low. Indeed, it's time to look for a real correction once again.
To be sure, when a major trendline breaks, it does not always signal an imminent decline. Many times, the ensuing phase can be sideways as excesses built up during the rally are worked off. Therefore, we have to reign in the doom and gloom until a true declining trend emerges.