SYSTEM DESIGN
Making Adjustments Is Critical
Post-Bubble Problems
by David Vomund
For the markets, these are extraordinary times. In the last five years we've experienced the largest equity bubble in US history, and also experienced
a bear market comparable to the Great Depression. Technical analysis remains
valid in the aftermath of the bubble, as market movement is still based
on the laws of supply and demand.
The bubble and the ensuing bear market does pose problems to many forms
of analysis, however. In this article I will expose three post-bubble problems
in technical analysis. After learning about them, I hope you'll be able
to spot these issues in your own analysis and make appropriate adjustments.
PROBLEM 1
Wild price swings hide the chart patterns
Most people use arithmetic charts so that the price scale (y-axis) increases
in equal increments. For a given period, the graph encompasses the highest
and lowest stock price. The vertical (price) scale is divided into equal
increments. This style of graph works for short-term charting, but problems
appear when stocks are charted using a period of more than a year.
...Continued in the October 2003 issue of Technical Analysis
of STOCKS & COMMODITIES
Excerpted from an article originally published in the October 2003
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2003, Technical Analysis, Inc.
Return to October 2003 Contents
