It can be stated that technical analysis as a methodology for forecasting direction of price is part art, part science. Thousands of hours of screen time puzzling over various kinds of charts is akin to an artist perfecting her craft, spending thousands of hours putting paint to a canvas. These days, much of what I do is quantitative in nature as that allows me to more accurately forecast outcomes for my overall trade plan and P&L. But it’s in the art where I fall in love with this business time and time again. My favorite part of the whole process of money management and trading will forever be getting lost in the thousands of charts I look at each and every week.
The beauty of putting in the hours visually, is that over time you begin to see that patterns and consistencies exist among stocks, commodities, etc. Do understand that the mind is designed to see patterns where none exist, and use this to your advantage. Be critical of “close enough” and apply quantitative methods (the science) to your art when the time is right.
A recent example of how I was able to use the “art” aspect of technical analysis to exploit and profit from an earnings release is that of $SSTK and $PI.
Shutterstock and Impinj, two unrelated companies with the exception of one thing: their charts.
SSTK was a setup I spotted last fall before it announced earnings. At first glance I didn’t think much of it, but it was pointed out to me at the time the potential it had as an earnings trade.
The above turned out to be what technicians refer to as an island reversal pattern. I linked to the breakdown of that should you wish to read up on it. Now that I am “out of school” I don’t get caught up in definitions printed in textbooks. I focus on what I think gives me the best chance to profit. Whatever you want to call it, I owned SSTK prior to it gapping up. A very pleasant and profitable experience that contributed to my vivid memory of that overall chart setup.
Most recently, I came across the chart of PI, as it was pointed out by someone in our trading room as a stock that was releasing earnings this week. Let’s see if you can see some similarity between SSTK above and PI:
Pretty slick right? Same overall look and feel, and same outcome. This is an example of where the art paid off handsomely not once, but twice. You can bet if I come across this particular look again, I will make sure to place my bets accordingly.
As I write this, I am exiting my PI call position for a nice gain thanks to some simple pattern recognition and my favorite part of the job, the art.
Have an awesome Wednesday.
OC