By Angel
Abcede
CHICAGO –
Candlestick reversal patterns, shooting-star tops and long-legged dojos were a
few colorful ways observers of stocks, or any other bought-and-sold item be it
commodity or contract, use to describe trends made visual when turned into a
certain type of bar chart, according to one economist.
Addressing
a workshop of about 75 people held during the NACS State of the Industry (SOI)
Summit, Walter Zimmermann, chief technical analyst, United-ICAP, said retailers
have the ability to see warning signs that a particular stock or commodity is
about to take a bad turn in training, based on even a limited understanding of
historical movement.
“Having
some knowledge is better than no knowledge,” he advised. “So when your broker
is telling you to buy a certain stock, you can tell him to hold off, so you can
look for yourself to judge how the stock is doing.”
Simple
software applications can turn historic data on any stock or set of commodity
prices into a graph that is at once an ongoing frequency chart and a bar chart
moving left to right with the horizontal axis noting hourly, daily or monthly
demarcations.
Using a
stock example, he showed a frequently used pattern called a “candlestick,”
named because it combines vertically standing bars, the colors red and green to
note rise or fall and lines going through the center. The vertical bars look
like candles.
Going back
to his example, Zimmermann showed how certain candlestick patterns revealed
when investors started losing confidence in the sample stock, which promptly
followed with a downward spiral in price. He said many of these historic
patterns create visually distinctive images, leading those who follow such charts
to come up with colorful phrases to describe them. Some of these names include
“hammer bottoms,” “shining-star tops” and “long-legged dojos.”
Zimmermann
said other tools exist to help validate candlestick patterns. One of them is a
“relative strength index,” which charts the momentum of a stock over time. “If
the gas is zero, momentum will slow,” he said. Such tools will “indicate if I’m
going uphill and am about to go backward.”
Speaking
to the issue of high frequency trading, Zimmermann felt the controversial use
of complex computer analytics gives an unfair advantage to larger hedge-fund
traders. The ability to analyze thousands of bits of data in a matter of
seconds stirs the velocity of trading, makes the market hypersensitive and
creates unprecedented levels of volatility, he said.
Zimmermann addressed
the general session of the SOI Summit earlier
in the day, predicting that stocks are in a growing bubble and warning attendees
that the current economic recovery may belie yet another economic collapse.