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TLStockPicks (88.65)

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

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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.

1 Comments – Post Your Own

#1) On April 01, 2009 at 5:04 PM, mustbepatient (29.72) wrote:

TL,

In my observations, successful traders do what works until it doesn't work anymore, then they do something else.  I think that explains why there are always new strategies and terminology being created.

I think I know the main reason TA works, and it's mostly that other market participants are expecting it to work too.  For example, buying near simple lateral support works often because other traders are doing the same thing, providing a critical mass of buying that causes the price to move back up.  Most traders will cite a psychological reason for the phenomena they chart, but I think my reason makes sense.

In my investing, I see the TA group as yet another market participant that can be (and is) manipulated.  For example, every significant bottom in the stock market seems to take a formation of a technical breakdown, which causes the TA folk to sell and/or short, soon followed by a huge rally as the TAers are all on the wrong side of the trade.  So if you're an investor, you can still profit from knowing TA because you can tell when TA folk will all be on the other side of the trade.

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