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One of the most dangerous market myths is that the market always rises over time.
Believers in this myth would trot out historical charts that have been reconstructed from the middle of the 18th century. And sure enough, the long term trend marches inexorably upwards. Even drammatic market crashes like that of 1929, 1987 and the tech wreck of 2000 all become just little blips in this overall magical rising trend.
To many investors, this underscores the buy-and-hold strategy. Just buy-and-hold and the market will bring you a windfall eventually. Right?
Wrong. Unfortunately, this is a pure myth and simply untrue.
The truth is that it's market index always rises, and not the market. The market index rises because the index only includes winners. This is called survivor-bias. The components of the index change on a regular basis, when market conditions warrant.
The Australia's S&P ASX 200 index, for example, is rebalanced every quarter by Standard and Poors' who compiles the index. Just in the last quarter, three stocks were dropped from the index because they were the worst performers. They were replaced by three others which were better performers.
When losers are dropped and winners added, it's no wonder that the market (index) always rises. Even blue chip stocks can be cut out from the list if they fail to perform. Too bad if you happen to own them and plan to keep them for the long haul.
Japan's benchmark Nikkei Average has hitting 18-month highs in recent days, prompting market analysts to predict that the index would breach the 12,000 mark by the end of this month.
The short-term gyrations of Portuguese tinkering, Irish blarney, Italian bluster, Greek debt and the care-free Spanish (PIIGS) have a cumulative impact of the euro-dollar relationship.
The weekly euro-dollar chart gives a better view of the strategic perspective. Against this chart we must also balance the degree to which the greenback's strength, as shown on the U.S. dollar index, is increasing the pressure on the euro as distinct from pressure applied by the Euro zone PIIGS.
A simple analysis of the Euro-Dollar chart has these features.
Oil prices are poised to rise higher, but be ready to stomach volatility. An analysis of the its weekly chart shows the development of a broad upward sloping trading channel , in chart speak, which confirms this trend.
Oil prices, like most markets, rebounded strongly last year, in tandem with the global economic recovery. Towards the middle of 2009, however, while other key markets began to lose momentum and develop a trading band pattern, oil continued with its upwards climb within a trading channel.
There are several important features in its chart which underscores the commodity's bullish trend.
Cathay Pacific's posted its best six-month profit in two years on Wednesday, sending its shares up more than 3 percent.
While it's easy to attribute the Hong Kong flagship carrier's recent stock gains to its improving earnings, a closer look at the firm's stock chart shows a broad cruising pattern that's unlikey to be significantly altered by earnings releases.
Markets start to incorporate news when it's just rumor and the information is quickly built into the price behavior.
This makes stock prices best summary of all the information that is known, guessed at, speculated about and suspected. However, this doesn't mean the price is absolutely 'correct' as it combines intelligence and ignorance, both of which are not always in equal measure.
Which, in a roundabout way, brings us back our chart focus of this week: Hong Kong-listed HSBC. The chart shows four technical features, all of which anticipated the bank's disappointing earnings report on Monday.
In the world of stock analysis, fundamental and technical analysis are on completely opposite sides of the spectrum.
Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock, which means the study of everything from the overall economy and industry conditions to the financial condition and management of companies.
Earnings reports give a good idea of what the past looked like, and perhaps guidance to how the future may develop. For investors and traders the important question is related to the degree of room for future growth.
The question they ask is: what is the upside? When we compare the charts of Dell and Hewlett-Packard there are two very different answers.
Nintendo's earnings have held up relatively well given the damage Japanese companies have suffered from the financial crisis and the strengthening yen.
While the video game maker posted a 41% fall in its 9-month profit, it's still keeping its full-year operating forecast and raised its software sales target for its Wii console for the year ending March 2010.
Nintendo shares, however, haven't done so well. While the stock has rebounded in recent weeks, it's still lost about a sixth of its value over the past year, in contrast to the overall technology sector, which made a spectacular recovery in 2009 in tandem with the global economic recovery.
So what happened here?
The weekly chart of the Australian listing for Rio Tinto shows this has been a remarkably simple trend trade starting in December 2008 with the trend confirmed in March 2009.
There are times in the market when nothing more complicated than a twenty cent plastic ruler is required for making good money – or in more modern times, a simple charting software package and a straight edge trend line .
Daryl Guppy is an independent technical analyst who appears frequently on CNBC Asia.