Foolish Respect
June 16, 2011
– Comments (3) |
RELATED TICKERS: SPY
Technical analysis, unlike Fundamental analysis, is not a science. As zzlangerhans mentioned to me yesterday, "consider it to be the herbal medicine of the stock market, beloved by its proponents but never subjected to prospective testing." And he might be right(the call I made yesterday is doing just about the opposite....). However, it IS a math. In fact, I have seen that technical simplicities such as the simple and exponential moving average are signs that even fundamental investors sometimes use as sell signals.
As mentioned before, pure technical analysis IS a bit daft sometimes and can go terribly wrong in a company with bad fundamentals. However, if you find something that fundamentally can't be argued with such as the S&P( as an index, I've never heard someone argue against investing in the S&P 500), sometimes simple technical indicators like moving averages can tell you something about the major shifts of the overall market.
A commonly used technical indicator is the MACD-Moving Average Convergence-Divergence. In its essence it uses moving averages, although it graphs them and displays them using specific formulas: MACD
Users of the MACD say that you never want to invest or sell unless the average crosses the line completely one way or another. I wanted to apply this to the greater market so I went to the S&P 500 index on google finance. Interestingly enough, before 2000, the MACD on the S&P had never been below 17. If you decided to buy/sell your shares of the S&P everytime the S&P was above/below 20(margin of safety), here would be your trades:
note: if it is between -20 and 20, this would indicate just a hold call. -20 and 20 are the buy and sell alerts.
Buy Dec 1995 at around $600
Sell Dec 2000 at around $1300-avoiding the crash with near perfect timing....
Buy June 2003 at around $1000
Sell February 2008 at around $1300-AGAIN avoiding the crash with near perfect timing....
Buy August 2009 at around $1000
And that would be your last transaction...the S&P has yet to go below -10 since then. Just FYI as of February it was at 40, but now it has gone down to around 20. Keep in mind that fluctuations don't have the great record, its just the simple crosses above and below 20 that matter. Also, the MACD I used was on a greater historical context. I went to google finance, hit the "all" for my time context, and used those numbers. It appears that the numbers change based on the time context, for example, May 20th had a MACD of 2.8 when i looked at it in the context of 1 year, where it had a MACD of 40 when I looked at it in the "all"/full history of the S&P.
Just an observation that makes me think it would be foolish to dismiss technical analysis completely.
Shamapant.
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