Charted Territory: Letting the Charts Come to You

Think long, think wrong, the technical trader says in examining a trade gone bad.
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Damn that AIG (AIG) - Get Report. Ruined my entire January. In fact, without that one stinkin' trade, I'd have had a pretty good month. Worst of all, it was a trade I didn't have to take. And that hurts.

But I rarely learn anything from my good trades, so let's take a look at AIG and see where I went wrong. Remember, an acceptable long candidate for me has:

    A high-volume surge; Congestion that spans at least 20 days; A good, noticeable break from that congestion; and A good "gut feel."

So, again, what went wrong? Well, this is clearly a case where it was a good, but not perfect, chart. In short, it was a chart I had to ponder rather than immediately take or dismiss. And whether you trade like I do or use another method, the point I want to hammer home is this: Be patient. Let the charts come to you. I sometimes go for a few days and do nothing. That's right: nothing. No longs, no shorts, nothing. But then I become antsy. Start looking for something. Start thinking that maybe the charts have stopped "talking" to me. Start questioning whether I've "lost it." I never have, of course, but the mind is a funny thing. In the case of AIG, it wasn't so funny. It was just expensive.

On the other hand, I did make one trade I was proud of, and that was my short of

IBM

(IBM) - Get Report

. Now this is a trade where it all came together.

What went right here? A lot.

    A gap down on heavy volume; A break of a short-term trend line; and A break of a long-term trend line.

In addition, I knew IBM would have to almost make a new high -- again -- in order for me to get stopped out. TA aside, I thought that was unlikely. I mean, unless something phenomenal happened, all the news was already built in. This was a chart that took me two seconds to decide on. And, about as long to close. It wasn't a force, and the chart just came to me. A winner.

Conclusions? A few. First, unless you have a bulletproof scan in which you take

all

candidates generated, you still have to use a bit of feel on your charts. The simplest and still the best way for me to do that is to go through each of my charts very quickly. The good ones always pop out, while invariably the bad ones require me to mull them over. (By the way, this is why I'm personally not a fan of stock-picking bulletin boards. I generally don't want to be "convinced" that a stock is good or bad. If I've done my homework, I know that after a few seconds of looking at the chart. That said, I do like the two GBS bulletin boards on

SI

and

Yahoo!

)

Therefore, my priorities work like this: I spend a lot of time coding what I intuitively see in the charts. (Or, rather,

Wesson

does.) But then I just let the computer do the scanning, while I let my mind switch to "intuition mode," picking out the best of the candidates returned.

I've looked at thousands, maybe millions, of charts over the years. I'm bound to have picked up a few things I just can't articulate. Shoot, I know strong charts from weak ones. And AIG was a weak chart. I just didn't listen.

Gary B. Smith is a freelance writer who trades for his own account from his Maryland home using technical analysis. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. This column, Charted Territory, appears every Wednesday. Smith also writes Technician's Take, which appears every Monday, and TSC Technical Forum, which appears every Saturday and Sunday.