TLStockPicks (91.99)

Technical Stock Analysis: An Exercise in Creative Writing and Fuzzy Logic?

April 01, 2009 – Comments (1)

Technical analysis annoys me to no end.  I don't doubt that it is effective for short-term trading... actually, I think if used right, it can be a very profitable tool for trading (though you better have a vomit bag next to you).  So, unlike most other critics, I do not criticize the practice as being unfounded or stupid.  Rather, the thing that annoys me is how the analyses are written... and then how little 90% of practitioners seem to understand about the underlying principles of WHY any of it works.

Ask most chart readers to analyze a stock, and you'll hear expressions like "90-day trend lines are testing lower Tirone supports" or "we expect the stock to follow a Fibonacci retracement to form a head and shoulders pattern" or "prices have recovered from a J.Lo bottom and broken through resistance to form a golden cross... BUY!" (sorry if any of that doesn't actually make sense).   Reactions from non-practitioners usually react one of two ways: 1) whoa, this is too advanced for me aka I don't understand the terminology, or 2) this is all jibberish and has nothing to do with stock analysis.

I guess my reaction is somewhere in the middle.  I understand and appreciate the complex math behind some of the chart analyses.  I believe that it's not unreasonable for a profitable day-trading strategy to be derived from analyzing the chart performance, which may lend clues to the trading tendencies that the involved, active traders of that stock may have (especially whether they have historically tended to buy and sell on specific technical indicators). 

But I hate the ridiculous and esoteric ways these analyses are written.  How can you have a childlike observation of the "head and shoulders" shape of the chart ("Mommy, that cloud looks like a goat!") and then jump right into something as uber-nerd as Fibonacci sequences?  Or the use of verbs that try to personify stock price movement as if the price itself is scared to break through support lines?  Or the ever-growing vocabulary that gets created (the J.Lo bottom is a real "technical" term.)?  It just sounds like some finance geek decided to take a creative writing class... here's the midterm paper.

Then, when you ask these technical "analysts" why exactly any of these things indicate a buy or sell signal, they are quick to respond with more technical mumbo-jumbo... and if you ask them about that, they'll keep going with more technical vocab until you realize that he'll keep reaching into his never-ending bag of made-up words and you're never going to get the answer you're looking for.  And here's the secret: when that happens, it usually just means the guy you're asking has no clue why it works either.  It's just been working for him.  And he's happy to tell you that he's smarter than you because you can't see the genius behind the madness.

God that's annoying.