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Technical Analysis: if x then y unless maybe z or gamma or pi

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March 01, 2008 – Comments (8)

I can't stand technical analysis. 

How does it typically go? If the S&P doesn't hold support at the level the chart supposedly shows, then it will fall further.  Well no kidding.  The thing is, you don't need a silly chart based on irrational patterns, you know, something like pi or square root of two... Take the technical analysis out, and what are you left with, if the S&P falls below this level, it will fall further.  For sure it will, if it is below that level, it has fallen further.  The chart did absolutely zero!

And they write books on this drivel and study it akin to how the ancient Greeks decided a harvest would be good if the slaughtered pig's blood flowed more to the left than the right.

There is no rational pattern to the market.

8 Comments – Post Your Own

#1) On March 01, 2008 at 4:14 PM, joeykid13 wrote:

Now that is the first technical analysis that has ever made sense to me.  Thank You dwot.

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#2) On March 01, 2008 at 4:20 PM, abitare (49.76) wrote:

Amen. We are aligned again, mostly. I like a chart pattern: a climb mountain, then a cliff jump, ie CROX

Best book on techical analysis is: A Random Walk Down Wall Street 

Amazon Reviews:

By Vincent Poirier (Dublin, Ireland) - See all my reviews

This review is from: A Random Walk Down Wall Street: Completely Revised and Updated Edition (Paperback)
In a nutshell Malkiel's advice is to own your own home, buy no-load index funds (equities and bonds), buy international index funds, and mix your investments according to your age. You should also have medical and plain term life insurance, and cash on hand for a few months in case of an emergency. This book is a complete course in how to manage your money effectively, whether you're a millionaire or a low-income earner. It also gently but firmly chastises proponents of get-rich-quick schemes such as day traders.

First, the book explains what is financial risk, and points out that everything is risky, even insured savings accounts since inflation can destroy the value of cash. Malkiel describes just how risky various investments are, and how the risk is one investment is often offset by the risk in another. Second, Malkiel describes a variety of specific investments (e.g. no load index funds, your own home, individual stocks) and suggests how individual investors should mix them, depending on their personal circumstances. For instance, an ambitious young woman in her twenties can consider aggressive high-risk high-growth funds. If they boom, she's rich, if they bust she's young enough to recover her losses through income. This would not be true of a middle-aged couple about to pay for their children's college years.

"A Random Walk Down Wall Street" should be in every family's library.

114 of 135 people found the following review helpful:
An academic's view of Wall Street, May 1, 2003 By Mark D. Wolfinger (Evanston, IL United States) - See all my reviews

A Random Walk takes the reader on a path from the point of view of an academic, rather than that of a trader. That is sufficient to make this book different from most other stock market tomes. Malkiel's premise is that neither the the average investor nor the professional trader can expect to perform better that the "market" over any significant period of time. He considers market events to be random, and thus unpredictable. He offers piles of data to support his contentions, and his arguments are compelling.

Yet, those who trade using technical analysis scoff at books such at this, claiming their systems consistently beat the averages. The author points to the fact that most managers of mutual funds, pensions etc. fail to perform better than index funds and Malkiel recommends that public investors place their investment money into broad based index funds. The S&P 500 Index fund is recommended, as it is unrealistic to expect fund managers to perform better.

This classic has been around for 30 years and this revised edition is worth your time, especially if you have never read an earlier edition. Just be aware that many technical traders consider this to be a work of fiction.

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#3) On March 01, 2008 at 5:26 PM, QualityPicks (22.57) wrote:

I like technical analysis but just a tool. A lot of the technical stuff out there is silly. But I don't discard everything as useless. It is just that there are so many people out there trying to scam you, trying to get your money, making so many promises and deliverying squat.

But I like to use some technical analysis. Same thing about psychology, I pay some attention to it. The way I see it, fundamental analysis should be your foundation, but you should compliment it a bit with simple common sense technical analysis and psychology.

But fundamental analysis also has its problems. A company can have awesome financial statements. But that is "the past" and markets are always trying to look to the future. So your fundamental analysis has to be "smart" and forward looking.

Anyway, there is no holy grail. Not even the combination of all the different methods. You will never know for sure. But there are things that help you. We are just trying to find an edge.

I personally, still have problems with my emotions. I am getting much better, but I still have a hard time buying when markets are selling off, and selling when the going is good, or with being patient enough to not care about sell offs and hold for the long haul.

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#4) On March 01, 2008 at 5:52 PM, floridabuilder2 (99.32) wrote:

TA works.............. it can improve your portfolio performance... just like insider trading

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#5) On March 01, 2008 at 7:08 PM, devoish (96.28) wrote:

It seems to me that T/A can work to some degree. For instance if large funds are buying GE, and getting new money to invest every 2nd week as people max out their 401k's it could create a floor or support level. It also is believable to me that a large fund may purchase GE or MO or COP whenever it reaches certain F/A targets, such as a P/E level,  creating a pattern that T/A can follow.

But it also seems T/A has grown beyond what it can do, feeding off of itself as more and more players have been getting in the same game, trying to outsmart each other. With the market falling and some T/A players losing their chips the game is now getting smaller as the best players will knock the weaker players and then each other out. Kind of like college basketball and good luck getting to the final four.

We will all hear about the big winners and how well they did.

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#6) On March 01, 2008 at 7:48 PM, cubanstockpicker (< 20) wrote:

TA works when everyone wants it to work. By creating a market pressure upwards meaning it has gained momentum, creating additional buyers that make it gain more momentum, then you have a rally and people keep buying because the stock has broken resistance and should trend upward because the little straight line some technical trader can put under the random line makes us find a pattern that isnt really there.( See "Man finds Jesus in Bagel")

I understand you can make good money on technical trading. Especially if you sit and watch looking for the movement. But there really is no basis for it. Just like the EMT isnt real. Read David Dremans book on contrarian investing. Buy value with plenty of cash.

 I understood your point on techincal and think its a joke when Fast Money puts on the little lady that reminds me of the spritualist from Poltergeist. And technical trading always sounds like color commentary in sports. "The key to winning today will be scoring touchdowns", and other brain stimulating comments as those.

But hey, dont fight it short term. It works, it works great, SHORT TERM. 

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#7) On March 01, 2008 at 11:14 PM, AnomaLee (28.76) wrote:

technical analysis is just another ill-used word such as: love, terrorist, inflation, or smoking causes cancer :)

However, we all do it to some extent or not.

If  X(stock symbol) = Z(stock price) then buy/sell

However, most advocate more technical forms, but even Benjamin Graham suggesting not to buy stocks trading above 3x book value in The Intelligent Investor is a form of program trading(investing) using technical analysis. There are things that have worked well with very high accuarcy. However, there is nothing that is guranteed with 100% absolute certainty. Maybe with the exception that banks will forever print more & more dollars and that is fundamentally why the value securities will continue to rise long-term.

"In this world nothing is certain but death and taxes." - Benjamin Graham

 

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#8) On March 02, 2008 at 12:11 AM, FleaBagger (28.14) wrote:

I think technical analysis means investing based on past price and volume, and other statistics derived exclusively or almost exclusively from those two (i.e. support levels, bollinger bands, the like). I think that TA alone is like timing the traffic right without paying attention to whether or not you should be crossing the street. Maybe you were on the right corner to begin with.

Once you know from fundamental analysis and valuation that a stock is one you should be invested in, TA might help you get a better price point or wait out a flat stretch better. It's a fact that TA has helped some experts call a bottom on crazy-go-nuts sell offs in the broad market or call a top (Jim Cramer, for one).

I would rather use fundamental analysis without technical than technical without fundamental (and in fact that's what I do). Besides, fundamental analysis is affordable. 

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