During the last year, almost everyone in the Saudi community started participating in the Saudi stock market. The market was in such a major bull up trend that even high school students with no investment background easily made money.

Recently, after the market has retraced more than 100 percent of the previous advance and many people have lost their hard-earned savings, the question remains as to whether technical analysis could have helped in predicting the forthcoming correction.

There are those who argue, “Technical analysis can not be applied to the Saudi stock market,” these people should know that any student of technical analysis can prove the fallacy of this statement. Technical analysis can be applied to any stock market because it is the study of price action and price action is always reflected in the charts.

You do not need to know why prices are moving in a certain direction, you only need to know the effect. This is the major difference between people that use fundamental analysis versus the strategy used by technicians because eventually the reason for any price move will become apparent.

The following technical analysis tools show where the forecasting implications were pointing before the major correction took place:

1. Momentum indicators signaling overbought and oversold conditions were all in the overbought area.

2. The major bull trend line was broken decisively on heavy volume, in fact one of the major reversal patterns was seen during the end of February 2005. The “Spike”, a major reversal pattern, appeared signaling a forthcoming major reversal in trend.

3. Sentiment indicators focus on investor expectations, these indicators are used by “contrary” investors to help determine what the majority of investors are expected to do then they do the opposite. The rational behind this is that if the majority of investors heavily invest in the stock market then there will not be enough cash to push prices higher. This is exactly what happened in the Saudi stock market. Some may argue that sentiment indicators, similar to the put/call ratio or asset/cash ratio, are not readily available for the Saudi stock market. I reason that even though this is essentially true, during the month of February the majority of people expected prices to push higher. In fact, the Tadawul All-Share Index was estimated to break the 21,000 barrier and keep moving higher. Some were talking about index reaching 40,000. From these investor expectations alone, a contrary opinion could have been built.

In short technical analysis can indeed be applied to the Saudi stock market, in fact it is a stronger tool than most professionals would perceive.