Alan Shaw Says the Days of Charting Stocks By Hand Are Over

Market Psychology

Understanding investor psychology is crucial in navigating stock market dynamics. Alan Shaw shares a story illustrating how stocks can peak when business is thriving, highlighting the market's future discounting mechanism. He emphasizes the role of fear and greed in market behavior, which is now studied under behavioral finance 1. Shaw notes that sometimes being over-informed can hinder objectivity, as portfolio managers might interpret charts differently without knowing the stock's name 2.

Stocks can top out when the business couldn't be better, like they will bottom out when the business couldn't be worse.

--- Alan Shaw

This underscores the importance of understanding market psychology beyond mere fundamentals.

   

Market Signals

Market timing and signals are essential for identifying market movements. Shaw recounts using point and figure charts to detect supply and demand dynamics, advising a client to sell shares when rallies failed to break out 3. He reflects on past successes, like his call on gold in the early '80s, and critiques the crowded trades in hedge funds today 4.

A rally that fails to break out is selling into strength, like a decline that fails to break down is buying into weakness.

--- Alan Shaw

These insights highlight the importance of understanding market signals and timing for successful trading.