Hello Fellow ChartWatchers!
Every week we hear about a couple of message board posts that have appeared on some website somewhere which essentially says "StockCharts.com is saying that this stock will rise (fall) dramatically!" Here's a screenshot from a recent example:
We said that? What? Huh?
First off, let me state for the record that StockCharts.com is not in the business of predicting stock movements. We never have been and we never will be. We provide tools that help anyone make their own predictions using any method that they feel comfortable with. If you ever think that we are recommending the purchase or sale of a particular stock, please think again and then re-read what we said.
OK now that that is out of the way, why the heck are these message board posters making the claims that they do? The first thing to understand is that ninety percent of these claims are made in "investment spam" messages. These messages are trying to trick people into buying (or selling) the stock in question without first doing due diligence. Hopefully I don't need to remind a fellow ChartWatcher like yourself of the need for lots of research prior to making buy/sell decisions.
That said, most of these messages also come with a link to a point and figure chart on our website - like this one - and, sure enough, that chart has a line on it that says (for example) "Bullish Price Obj. (Rev.): 38.5".
Here's what the spammers are trying to get you to do. They want you to think about things like this:
Wow, seems like StockCharts.com really is making a prediction about that stock. Seems like the good people at StockCharts think RMBS is about to tank big time. Ya know, John Murphy works with StockCharts.com and he's an expert. I think I better sell my shares!
Now, here's how you should be thinking:
What the heck is a "Price Objective" on a Point and Figure chart and what does it really mean?
Remember, just below every P&F chart is a link called "About Price Objectives". It leads to our ChartSchool article with all the gory details about how we calculated P&F Price Objectives and it contains numerous warnings about how they should be used. I urge everyone to read that page carefully but the bottom line is this: Price Objectives are simplistic and very unreliable. At best, they represent an upper (or lower) bound for the stock's next big movement. At worst, they are ammunition for scam artists.
So why have Price Objectives at all? Price Objectives hark back to the early days of Point and Figure charts when Technical Analysis was still in its infancy. Things like Bollinger Bands, MACDs, and MarketCarpets had not been invented then and Price Objectives were the best people had. Don't get me wrong, when properly understood, Price Objectives can be another useful tool for any chartist. Unfortunately, most people do not take the time to understand them and the scam artists count on that fact when posting their garbage.
Don't be fooled.
P.S. Happy Holidays everyone! Our next newsletter will go out in January.