Invest With the Power of Human Nature

Doc's note: Human nature is one of the biggest drivers of what happens in the stock market... We saw this last week when stocks plunged and volatility soared as folks feared for the future of companies pouring capital into AI infrastructure.

But today, as Greg Diamond explains, you can use human nature to help you gain an investing edge...

"Human nature never changes..."

"History repeats itself..."

These adages stick around because they're true.

They even apply to the market... The ups and downs of the market are nothing more than the graphic representation of human behavior... expressed on a chart of buyers and sellers.

And this market behavior tends to repeat.

That's how technical analysis works. We know what's happening because we've seen this all before.

Today, I'll explain more about how we can use this to our advantage as investors...

Here's a perfect example of a type of technical analysis that warned of a storm brewing at the start of 2007... well before the market crashed in the financial crisis.

It's called "intermarket analysis." This idea is based on correlations between asset classes. When one of these asset classes turns down, it may be a warning sign for other asset classes (in this case, stocks).

We know this because these chart patterns have shown up before, and those other assets have fallen.

Take a look at this chart. It shows the relationship between the S&P 500 Index (in black) and U.S. 30-year interest rates (in blue) right before the financial crisis...

The S&P 500 and U.S. 30-year interest rates traded in tandem for much of the early 2000s. Then, in late 2007, the correlation broke down. Interest rates started to turn down – a sign of a slowing economy.

Look at the red line...

See how stocks made new highs, while interest rates failed to? That was a warning that something was wrong.

Of course, most of the fundamental analysts at the time pointed to strong earnings and solid "fundamentals."

The ultimate fundamentalist – former Federal Reserve Chairman Ben Bernanke – proclaimed around this time that "the effect of the troubles in the subprime sector on the broader housing market will be limited and we do not expect significant spillovers... to the rest of the economy or to the financial system."

You know what happened next.

This is the essence of technical analysis – understanding the behavior of markets and history. This concept is lost on many investors, who simply write it off. They just don't understand and aren't willing to put in the necessary time and effort.

Technical analysis is much more than trend lines and charts. It is understanding the past to profit in the future.

I'll be honest...

It took me a while to grasp technical analysis, too. But time and time again, I've witnessed how well it works.

I want you to see much more than the trend lines and patterns, and understand that we're studying the behavior of market participants... We're learning from history.

And to do this, we don't need to speculate about the reasons behind the behavior. We don't need to worry about fundamentals.

There's nothing wrong with wanting to know why a certain stock will move... But I'm much more concerned with when that stock will move and what the price will do (i.e., how much it will go up or down).

And think about what really matters in investing – WHEN you buy and WHEN you sell. The why is less important when it comes down to the goal of investing: Did you make or lose money?

That's all that matters.

Perhaps the greatest value in technical analysis is that it's both a trading strategy and a risk-management system wrapped into one. It shows us opportunities – and warnings. And it keeps us focused on making and preserving wealth.

If you're like most people, this is most likely a brand-new way to look at the market. So it's going to take some time to get used to.

But once you understand the basics, I promise you'll begin to invest in an entirely new way... and eventually reap the benefits.

Good investing,

Greg Diamond, CMT

Editor's note: Greg believes that the noise surrounding the midterms has opened a window of opportunity that could help you double your money. He's sharing why we're seeing this "doubling window" now and how you can use it to boost your portfolio's gains before the end of the year. Click here for all the details.