Why Technical Analysis Has Value In A Broken Market

Could you ever imagine a week in the markets when earnings reports from technology titans, such as Microsoft Corporation MFST, Apple Inc AAPL, Facebook, Inc. FB and Tesla Inc TSLA were secondary news? Or a Fed meeting? Welcome to bizarro world.

This week in the markets was just that way — and who knows how long it could continue? 

Fundamentals, Shundmentals: If the price action in the markets this week has proven anything, it is that fundamental analysis is dead for now.

When the week concludes, the biggest winners are going to be GameStop Corp. GME and AMC Entertainment Holdings Inc. AMC, and not companies that produced banner earnings reports that exceeded Wall Street’s expectations.

Instead, the big winners will be stocks being pumped and dumped on message boards.

Were some of these companies undervalued at the bargain prices they were trading at? Sure. On the other hand, are the heights these stocks reached this week representative of the companies' futures in the years to come? Who cares?

Technical Analysis Steps Up To The Plate: In a world where fundamental analysis is no longer a valid way to evaluate the value of companies, traders and investors may turn to turn technical analysis. In fact, a large portion of the investing world already incorporates technical analysis into its decisions.

When the other half of the formula is useless, this part of the formula becomes much more important.

For example, did the parabolic rally in shares of Bed, Bath and Beyond Inc. BBBY stall out at $53.90 for no reason? Heck no. Back in early 2016, the issue had a pair of monthly highs at the $52.50 area. The bagholders in the issue — who were stuck with a huge losing issue for years in the greatest bull market of all-time — were getting bailed out.

Does this necessarily mean that the stock is not going back to that high or $100, $200 or $500? No. But what you have now is a whole new set of bagholders who are waiting to get out.  

Since peaking at $53.90 on Wednesday, the issue traded down to $30.08 on Thursday and briefly traded over $40 in Friday’s session. How many investors are hoping it gets back to $50 for a scratch or to eke out a small profit?

Broken Markets: Whether you believe it or not, the markets are broken for now. For those who cheer the demise of hedge funds and large trading institutions, be careful what you wish for.

They are the ones that provide liquidity in the markets, and if you think they all are getting smoked now, you are mistaken.

The real demon in the house is payment for order flow, which has enabled brokerage firms to offer free trading. These firms are still making money — not from commissions, but by selling their order flow.

The solution? There isn’t one. SEC inquiries and investigations may uncover a few of the culprits in the schemes, but the cat is out of the bag. 

To be clear, this is not new. For years, hedge funds have beat up on each other in the markets for gains. The only difference is that the power is with the masses, and some of these same tactics are being used on a large scale. 

We are already witnessing the devastating impact this is having on the markets. If it continues in this direction, all investors large and small will suffer in the end.

A more in-depth discussion on this topic from Friday’s PreMarket Prep Show can be found here:

PreMarket Prep is a daily trading show hosted by prop trader Dennis Dick and former floor trader Joel Elconin. You can watch PreMarket Prep live every day from 8-9 a.m. ET Benzinga's YouTube channel, and the podcast is on Spotify, iTunes, Google Play, Soundcloud, Stitcher and Tunein.