About Some Limitations of Classic TA Following BABA Trade.

In January analysing the price/volume structure I made an assumption that the market participants had taken long positions in BABA ahead of its third quarter earnings report. The horizontal count from the November-December consolidation on the volatility adjusted intermediate-term P&F chart pointed to the test of the September highs in the case of a positive reaction to earnings. How would a trader follow a long position if he/she shared my opinion on BABA? A classic TA chartist draws trendlines and probably would be stopped during the February-March consolidation depending on a trendline (red trendlines). That’s because a trendline is a momentum indicator which measures velocity on a normal scale chart and acceleration on a log chart. It’s safe to say that a majority of traders don’t know the difference. Since both measures include a time component a long enough consolidation or even a slowdown of a trend can violate a trendline. To make matters worse a chartist draws a trendline measuring momentum on a time frame between two random volatility spikes (connecting lows or highs) which may differ from the real momentum of a trend. It is fine if a chartist understand all advantages and limitations of a tool he uses but judging by numerous charts on Fintwits most people don’t have a clue.

On the other hand P&F charts don’t include a time component. The intermediate-term P&F chart which was adjusted to the inherent volatility of the stock has not issued a sell signal yet and would keep a trader in a trade despite I use more sensitive 2-box reversal settings instead of common 3-box reversal one. Green box on the chart marks the level when the target calculations were made.

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