Technical Analysis is a common analysis used by many traders and investors to find the right timing for entry & exit. However, the entry & exit signal does trap some of your trades at the high side with false signals or early exit before a rebound.
One of the reasons is because most of the techniques, patterns, & indicators are for reflecting the current market or the underlying investment assets outlook purposes only. The analysis includes too many historical price movements to gauge the current outlook, which can be not related to the possible future price movements.
Most importantly, the factor that affects the traditional analysis reliability is because the concept is based on the fact that every market participant has the power to affect the underlying asset price. While everyone knows that the forces that move the prices in the financial market are mainly the big boys, we as small investors and traders have limited unity power to move the underlying price.
[ There could be a case like GameStop where many retail investors are grouped together to move the price higher. However, this could trigger market manipulation charges to the person who started the price movement. *US stock market nature is different from KLSE Bursa Malaysia*
Further question: if we, the retail investors pumped the price up, who are we going to sell the shares to for the profits? GameStop case is to force those institutional investors/ Big boys to close their short-selling position. So the retail investors are selling the shares at a high price to the big boys for profits. In addition, the timing was just right at that time where there was a limit cut/margin cut in the market at that time. That’s why these operations by the retail investors are able to do it.
But in KLSE, those Restricted Short Selling stocks are mainly big-cap stocks with high liquidity in order to protect the heavy fall in these stocks that will affect the indices overall. The regulation itself is totally different from the US market, that’s why is not going to work in Malaysia. ]
Video explanation of why GameStop case can’t happen in Malaysia : https://youtu.be/P6Amu4WwErI
If you agree with us, that the financial market is playing by the big boys' rules. There are many applications of Technical Analysis that will not work in the current market.
For example: Previous Low or High Doesn’t Represent Future Support/ Resistance Line.
Every trader will know how to plot a support & resistance line based on previous high or previous low. The theory behind this previous high or low is the future support or resistance because technical analysis assumes the market thinks or values the underlying asset price the same way. But the actual fact is that the big boys are the ones that have the power and money to move the market in their desired direction.
Continue reading below on how big boys operate in the market and you will know why plotting a resistance or support line will not work now.
Big boys often accumulate shares at low prices quietly without retail investors notice. Then they will mark up the price and sell it to you by creating volumes, price up, news or rumours to get your attention.
How do Big Boys take profit?
Have you ever wondered why there are retraces in every price uptrend? Many investors explained this price action as the “Bull” needs to take some rest to gain more momentum to “Charge” higher. Whoever said that to you, either they don’t understand how the market works or they don’t want us to know the truth, that's why they can’t explain why there are retraces in the uptrend.
The reason behind the price retrace is that the big boys are taking fractional profits on the way up. Big boys usually hold huge amounts of shares or units of underlying assets. Selling all their shares at the high side will cause a sharp price fall and also there won’t be enough retail buyers in the market to buy their shares. Because we will not dare to move into a stock that is going down right? (Unless we are holding that stock at a higher price and we might average down your position cost.) That’s why they can’t sell all their shares at a certain high price like us.
The general method for the big boys is to take the majority of their profit by selling a fraction of their shareholding on the way up after their accumulation. This way will not cause market panic and the price is continuing to move higher which gives us the confidence to invest in this stock.
Every time a price is marked up, the big boys will indirectly influence us to park our buy order above or at the biggest buy order level in the market depth; we the retail investors perceive this huge buy order as the “support”.
Which is the wrong interpretation of such buy orders. Because the order in the market depth or some call it the buy-sell queue, are just order placed in the market waiting to be transacted. It can be cancelled any time, it is not transacted. Can you still take non-transacted orders as support? Obviously, we can’t. That doesn’t represent the support, in fact, it can be a technique that the big boys place there intentionally to mislead us as the support.
Big Boys Selling Action
The big boys will monitor the inflow of the buy orders to see whether we have parked our buy orders at the range that they want. When there are enough retail buy orders placed at the lower buy order, they will then start to sell their shares down to us, who parked our buy orders at the price that we think is the “Support”.
This action will continue until the big boys find no more retail buyers are parking their shares at a lower price anymore. Then they will continue to mark up the price higher to a point that you and I notice this stock again by creating a flag breakout, resistance breakout, or an indicator crossover entry signal.
Now we know that all these retraces in the uptrend are the point that the big boys are selling, can we still take the high low point of these retraces as the support & resistance?
We can’t because these are the points that the big boys are selling their shares. When they have sold the majority of their shares on the way up, the stock price will start to reverse down, there won’t be any demand coming to support the price. If the big boys want to accumulate again, they will wait for the price to go lower and it is cheaper to accumulate at the price than accumulating at the high price where they have marked up by themselves right?
Finally, we understand why the support line is always broken and we are forever looking and hope that the price will rebound at the next support.
Does fundamental show the support price?
If the technical explanation doesn’t convince you, we will look into the fundamentals of it. Again, in the stock market, it is not what we think whether the stock price is low enough to rebound (Unless you are Warren Buffet). Is still up to the big boys to think when is the best price to move in, it is about when the big boys' funds come in at the low. Usually, these big boys have enough funds to hold these stocks for the long term, so the price will take some time to move up. Again it is not what you think, it is WHEN THEY want to support.
Coming back to the basic theory of stock pricing mechanism, other than the expectation of the big boys ( expectation includes how much they think about the intrinsic value of the shares based on the recent company’s business performance.), the total unit of shares, floating shares percentage, & many other variables that will affect the pricing. These factors that affect the pricing are changing every now and then, that’s why you can’t use the previous or long ago support line as of today's support line.
The stock prices movement is based on the big boys' expectations, by understanding their intention and accumulation point, we will be able to reduce the chances of getting ourselves trapped in a false technical entry signal.
If you understand more about how the big boys operate in details such as transaction data (tape reading), price & volume movement, & having good risk management in your investment. You can further maximize your profits and minimize your risk by making better investment decisions in when to start riding with the big boys after their accumulation and nearer to the high exit when they have sold the majority of their shares. You can read all these by understanding price & volume action through the available data in your broker’s trading platform.
You just need to know how.
Follow this YouTube link for an explanation on why resistance breakout doesn’t work in the stock market:
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