Charts can filter out emotion

Hi,

Here is an article about separating emotions from technical reads with regard to a stock that trades on NASDAQ (TASR chart). BTW, anyone cares to opine on whether it is going to have a bullish breakout as the author states.

-- Milind


The art of objectivity
Commentary: Charts can filter out emotion around Taser
By David Nassar

Editor's note: David Nassar is chairman and chief executive of MarketWise.com.

BOULDER, Colo. (CBS.MW) -- Most traders experience a rite of passage and baptism by fire during the first few months after opening up a trading account; emotional mismanagement combined with a general sense of complete and utter confusion as a stock appears to trade in a manner opposite of what they would think in light of the fundamental research.

A perfect example: Taser International (TASR: news, chart, profile).

Even if you are completely new to the world of trading or investing, there is a good chance that this developer and manufacturer of less-lethal self-defense devices has entered your trading universe. The real question is, "How can a trader effectively filter out the noise and look at TASR shares objectively?"

Do not buy TASR! Why? Well, for one, prisoner-rights group Amnesty International said stun guns are needlessly deadly and more testing is needed. A red flag. Moreover, many articles and reports have surfaced, especially in the New York Times, raising questions about safety and adding to the specter of debilitating lawsuits in the future.

In addition, it has been said that corporate insiders have sold 1.3 million shares, worth roughly $68.4 million, and this coupled with over 50 deaths associated with these "less-lethal" guns must have bullish traders running to the hills. Additionally, quarter-to-quarter sales growth has fallen from 24 percent to 16 percent in the third quarter. Do not buy!

If these reasons were not enough, consider that as of November 15th there were over 15.9 million shares short; thus making it clear many traders are in fact betting prices will fall. How can they be wrong?

This should be a proverbial slam dunk for bears; however, I feel it only makes prudent sense to explore another angle on TASR before coming to a decision. In fact, most true trading professionals only look at an objective, pragmatic analysis of the market, by studying supply and demand on a chart -- Technical Analysis (TA). Almost all the aforementioned information was simply subjective "news" that elicits emotions that run contrary to profitable thought. Do you remember when the bad news about Enron hit the marketplace? Trust me, it wasn't near the top and only a clear knowledge of charts patterns would have given a trader a "real" read of emotions.

Technical analysis paints the psychological picture from A to Z, and if a stock is in an uptrend in spite of a negatively spun fundamental story, technicians can easily look past the fundamental theme because they are comfortable with certain chart patterns that they have seen over time that allow them to define risk vs. reward and make clear what the path of least resistance is.

In the short-term, which is less influenced by the fundamental company performance, money flow and psychology are the underlying factors that technicians can use to get a sense where the money is going and what current psychology is. They may soon become more favorable to accepting the risk of an upside move vs. a downside slide. With that said, before we submit orders to go short TASR, let's explore the technicals.

As of this writing TASR is currently trading above its 10-, 20-, 50-,100- and 200-day moving averages (DMA). With the 50 DMA rising, a technician can conclude that shares have been traversing higher and that the path of least resistance is higher. Additionally, these moving averages are all pointed higher and they are aligned in such a way that the 10 DMA is above the 20 DMA and the 20 DMA is above the 50 DMA, and the 50 above the 100, and so on. Alignment in this fashion is bullish and reinforces the objectiveness of the trend -- bullish. What is more relevant to a trader, a bad news story or price action? Emotional traders generally follow the former.

Continuing on, there was a failed attempt in early November to take out the yearly highs of $32.08 and during the last month shares have been creating a symmetrical triangle and appear poised to breakout higher. Of course, who will fuel the demand? Well, for one, traders that have been selling TASR short (borrowing shares with an obligation to deliver shares back to the brokerage house, and a trader is forced to cover -- "called away" -- if the lender wants the shares back) may all rush in to cover at once if the primary trend continues.

Simplicity is the market's greatest disguise. Traders turn on the TV, gulp five cups of espresso, and then sometimes trade based upon information that most traders have fully dissected hours, sometimes days, ago. I have found that taking the subjectiveness out of the equation and using technical analysis can turn the opaque into the transparent. As the saying goes, "Trade what you observe, not what you believe." I observe price action in TASR as bullish and giving an antithesis reaction to recent fundamental negativity. And the best part of all is that, as a trader, I can limit my bullish risk via stop loss order and, if triggered, listen to the market. Of course, odds are I am right. Buy TASR.