Cause and Effect (Tom O'Brien 2002)

What causes us to do certain things every day in a certain way? We are looking for a certain effect to take place.

We are going to be looking at the volume and seeking out what each cause and effect is having on the stock.

Cause - the buying and selling.

Effect - what is happening to the price at those points.

We need both the cause and the effect to be consistent. If we are going up on higher volume, then the price should be moving up by the same increments. When we have higher volume for a few days and each day the stock is moving a point, and then we have a higher volume day with a movement up of only 1/16, we can see the effect is not the same. That is a warning that we will start to run into resistance

The opposite would be that we are moving down on volume and we see that each day we are losing two to three points. Then the fourth day we move down on volume but the price barely moves. The cause is there but the effect is changing. The importance here is that many times you can have a cause, but no effect. We are looking for the important causes, which will produce the effect we are looking for. This is where accumulation or distribution is taking place. The stock is going from weak to strong hands or strong to weak ones. We have a change of ownership taking place.

Technical Analysis

The market price of stocks tends to lead, not follow news. Thousands of examples have shown us over the years that whether we agree or disagree, like it or not something happens to impact the price before news breaks or a quarterly report is made public. It may not even be illegal insider information that drives the price up or down. It may be a vendor that has gotten a huge order for raw material from the company, and he mentions it to his brother-in-law who is an investor and can put two and two together. It may be a banker servicing the company notices that they are having cash flow problems and decides to sell his shares. The possibilities are endless. The simple fact is that you and I will not have that information as quickly or as directly as others. For that reason it is important that we understand how the simple law of supply and demand will force prices to move up or down, and that we can learn to recognize major moves in advance through technical analysis.

Is technical analysis always right? Not necessarily, but why not improve your odds of a successful trade with good technical analysis? Is fundamental analysis always right? No. How many times have you watched a company stock value languish or fall, in spite of the fact it has a beautiful bottom line? Many a fortune or college tuition has been vaporized on trades made on companies with a beautiful PE and five quarters of sequential growth.

Mechanical Analysis

There are many different mechanical systems that give buy and sell signals in the market. Some are as simple as a Head and Shoulders patterns, top or bottom formations, or computer biased proprietary systems. These systems are evaluating many indices occurring in the market and will give you signals from which you can make your trading decisions.

Judgmental Analysis

A judgmental trader is going to be using several principles applied in certain market conditions to produce consistent results. This approach relies heavily on observations of the market and using those principles to find the particular stock or market to trade. This is the focus of the information in this book. The more you study these principles, the higher the degree of proficiency that you will attain. The more I learn, the more I realize there is to learn and that the learning curve is never ending, forming a full circle of continuous education and opportunity.

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