Whether you like/believe in technical analysis or not, it’s worth knowing that in most bank treasury departments just about every dealer uses charts – daily. Terminals like Bloomberg and Reuters made their money transforming raw data into something visual, data that can be manipulated in many ways; rental of these machines funds their newswires, TV and radio stations.
Visualisation is a well-known, powerful communications tool, infographics are widely used in publishing. Histograms and pie charts representing people’s and nations’ characteristics, distribution and tendencies. Line charts showing the increase in a company’s share of the market or net profits. Maps shaded for temperature and rainfall. You know the kind of thing. That is not technical analysis.
Technical analysis plots the price of an instrument over time, either as a line, bar, or candle; point-and-figure charts plot price as it changes sequentially, but there is no time along the X axis. All well and good, but the skill is in being able to read the chart correctly. Like reading music, braille, ticker-tape or text, one must first be taught how to do it. Then, practice makes perfect and years of experience show through.
One important and often overlooked skill is working with different time frames, something I hope to explain today. Spot palladium is my example because price action is dynamic, moves are large, and trends clear – unlike some other markets that are flatlining. This suggests that this precious metal matters, that traders ard end users are actively involved, are prepared to pay up if necessary and slash investment positions when they sour. Unfortunately, I cannot track volume because this is an over-the-counter market; Comex in New York lists a futures contract, but turnover is a fraction of spot.
The daily bar chart shows this year’s series of zig-zags lower in a trend channel; mean volatility between one daily close and the next was 9 per cent. However, the tone changed markedly mid-August, slumping and reversing with a two-bar tweezers formation. Volatility soared the following week to this year’s highest, beyond two standard deviations, at 16.5 per cent. Prices were then set to smash through the channel and start a bull trend.
The weekly chart gives a better sense of perspective, 2018’s downtrend a correction to the previous rally inside a neat trend channel starting in 2016 – with a false break above it at January’s high. The pullback’s low is market by a dragonfly doji (the week of the tweezers), between the 38 and 50 per cent retracement support levels.
The monthly chart plots the big swings of the last decade, dominated by a rectangle formation at its centre, the 2016-18 rally mirroring the one starting in 2008 in both time and height. During these 10 years palladium has vastly outperformed spot gold, moving from a ratio of 47.5 ounces to one of gold to today’s 1.13.
Finally, a quarterly chart, something not used all that often and where, depending on the instrument and the provider, data is unreliable or non-existent. The salient feature here is the boom and spectacular bust between 1997 and 2003, caused by a car company cornering the market for use in catalytic converters; prior to that this was indeed sleepy hollow. It took another 17 years to step back up to the record high.
