[click chart to enlarge]

I prefer to leave stock market predictions to the more outspoken personalities and try to keep my personal own sentiment on the markets as read between the lines as possible, but occasionally, a technical analysis chart is so poignant that it would be irresponsible of me not to post it.

Chris Kimble, from KimbleChartingSolutions.com graciously allowed me to re-post one of most telling charts I’ve seen in some time, and with so many people new followers believing in the Buy On The Dips mantra these days, I thought SF readers should see this.

(If you’re wondering where the “Pretty Woman” theme originates, Chris is absolutely correct, from a technical chartist perspective, charts don’t get much prettier than this. Regardless of whether the charts are pointing for higher or lower stock prices.)

Three Key Points:

1. A trend is a trend is a trend. Markets going in a certain direction tend to continue to in that direction until they don’t. By no means is technical analysis an exact science, but it exists to expose the big picture and minimize losses, as much as it exists for short term traders to find entry and exit points to minimize losses as predictably as possible.
2. A head and shoulders pattern. A head and shoulders formation is usually indicative of a move to lower prices.
3. Cheap stocks can get cheaper. A 5% retracement in one week does not equal a bargain. Buying on the dips is a great strategy, but one of the key disadvantages is that whatever your buying can dip a lot lower after you buy it. So if you buy, make sure you’re buying for the long haul and won’t sell it for a double digit loss because you’re frustrated you bought too early, only to repurchase the same stuff six months later.

In no way am I suggesting that you should treat charts like these as biblical gospel and sell every stock, mutual fund or index fund you own. That’s not the purpose of me posting such a, let’s be honest, spooky chart.

But if we’ve learned anything since the 2008 stock market crash and the infamous flash crash of 2010, the market is a bit schizophrenic. Unless, of course, you consider that the today’s stock market is predominantly moved by technical chartists, high frequency algorithmic trading, and quants who don’t use the same types of investing 101 logic that folks like you and I might use when we’re buying a 100 share block of Exxon Mobil or Proctor & Gamble.

Bottom line: use charts like these to get a big picture idea of where the market may, or may not, be headed, then weigh the probabilities and outcomes of a rising or falling stock market against the likelihood you’ll be kicking yourself later because you bought at the wrong time.