Wednesday, April 25, 2007

Sears Holdings: A Technical Look

Sears Holdings (SHLD) is in the process of finishing the rarest and most important "technical analysis" chart pattern, the "humping bulldog." This phenomenon began in June of last year. You will notice on the chart below the arched tail of the bulldog as SHLD dipped until it bottomed in August of 2006. Then came the share price explosion upward from August to November, which represents the "humping" back of the bulldog. Predictably, the stock leveled out and dipped a bit (From November to January 2007) at the peak of the dog's back heading into its head.

Then, following this classic chart pattern, the dog's arched head is represented by the January to March upward trend in the stock. This is classic technical indicators of this pattern. The drop from February to mid March is the tell tale sign of the dog's open and panting mouth.

The euphoria the dog feels is represented by the share price appreciation both during the chart pattern and after it is completed from mid March to mid April. This bodes very well for SHLD shares in the future as the current downturn since the recent highs may just be the beginning the rarest of rare, "round 2" bulldog patterns. We will need to get confirmation of course like all chart patterns but it looks good so far.

The question that now needs to be asked is..... who bought that? If you did, why? While the name of my "chart pattern" was ridiculous, the theory behind it is not really any different than any other chart pattern out there. The thought you can anticipate stock prices based on a pattern they make is not really any different that guessing you future from the alignment of the stars or a fortune teller reading the lines in your hand. What really drives stock prices? EARNINGS, period. Both actual and anticipated earnings, in the end are what determine the price of a stock. Not a mythical pattern on a piece of paper.

Let's break it down. If earnings are what causes stock price appreciation or depression, then the lines on the chart simply reflect that sentiment. This means they are always backward looking in nature and give you no insight into any future patterns since their future trends depend on the future earnings of the company. It does not matter what "formation" the stock trading is making because if earnings beat expectations, the stock will rise no matter what the "chart" says it should do and vice versa if earnings disappoint.

I read on another post yesterday the saying "even a stopped clock is right twice a day". It is true. You will find occasions when the "chartist" accurately predicts price movement in a stock. You will, however, find multiples of instances in which the chartist "did not get confirmation of the pattern". Translation? They were wrong.

Earnings drive stock prices, not fortune tellers. The next time you are inclined to believe them, remember the "humping bulldog."


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