The classic school of modern-day chart technicians goes under the name of Dow Theory because it was founded by the first editor of the Wall Street Journal, Charles H. Dow, who became the Dow of Dow-Jones. In its classical form, Dow Theory compares the movements if two indexes, the Dow Industrials and the Dow Transportations, which according to Jack Schannep and the editors of thedowtheory.com, yields a buy or sell signal about once a year. To catch more short-term trends, all kinds of charting devices have been invented.
I think the most popular technical tool of the modern trader is the Moving Average Convergence/Divergence indicator or MACD (pronounced Mac-D). At the Wall Street Journal for example the MACD is a default feature of every dynamic chart, reflecting market movements into a graph that helps gauge probable short-term trends in price.
During the head-and-shoulders scare of early July, technical analysis dominated market chatter. Investors have plenty of fundamental reasons to worry about another downturn, so technical signals can really spook the herd. The head-and-shoulders pattern was a pure technical signal that things could get very bad quickly. It spooked me. As it turned out, either there was no head-and-shoulders or the pattern was more of a signal that something big was about to happen up OR down.
The head-and-shoulders pattern, if it was one, actually signaled a breakout or sudden uptrend--which is not the first opportunity I have missed (in the market as in life) because of caution poorly timed.
This week the technical question becomes whether the breakout has established a new floor for a short-term trading range. The fundamental school seems cautiously optimistic that data will continue to come in "less bad." And many of the technical chart analysts--including the ones who spooked us before--seem to think we're going to be trading a new level up, at least for the near term. Technical signals don't take all the chaos out of the market, but they do help you to feel as if you are not gambling on absolute randomness.
The third great family of market theory, The Elliott Wave, could be placed under technical analysis as a subset of Dow Theory, but I'm going to place Elliott Wave Theory in its own camp, because it seems like another order of technical analysis altogether.
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