Stock Market Technical Analysis - Loads Of Bull Crap And Bear Crap

by golbguru on May 28, 2009

In all the time that I have been away over the last few months, I have spent an enormous amount of time reading up articles on market technical analysis. At this point of time (it’s a continuing effort), I feel pretty disappointed with the whole concept of so-called “technical analysis” and with the “chartists” (market technical analysts who speak the language of charts) who make universal predictions about the universe based on such technical analysis.

Generally, from the events of past few months, I have come to a conclusion that “fundamentals”, “support”, “resistance”, “pattern”, “break-out”, and “dead cat bounce” are some of the most misused words in this area of pseudo-study (look up “dead cat bounce” on Google, it’s interesting). Given a time-history of a certain phenomenon (for example, stock price), one can calculate a plethora of brain-numbing numbers and relations; but all those numbers mean absolutely nothing if one cannot interpret the meaning of those numbers in the context of present and anticipated environment (including emotions, politics, public perception, and mass hysteria).

Moreover, you would think that if market technical analysis is just a bunch of numbers derived from a common stock price history, every chartist would have the same conclusion. Keep wishing on this! Depending on whether a chartist is a bear or a bull, he/she would try to put a different spin on the exact same numbers. Some of the chartists I have been following have been predicting a total collapse of the market since March 2009 - they are still waiting hopefully for that to happen. One group of chartist is predicting a “U” shaped economic recovery; another group of chartist is predicting a “V” shaped recovery; and yet another group of chartist is predicting a “W” shaped recovery. All these chartist should get in a room and come to a common conclusion over which letter of the English alphabet they want to use.

Then there are chartist who keep harping on support and resistance levels of a stock (or the market in general) and try to predict a stock’s future behavior based on these levels. The way I see it, support and resistance levels, like most statistical measures are backward looking measures - as such, support and resistance levels don’t dictate the future price of a stock, it’s the other way around. When stock price breaks its support, it is the support that changes, not the stock price. Whether the stock will keep breaking through its support does not depend on your silly calculated lines - it depends on people’s perceptions, anticipated future growth or decline, fear, euphoria, and herd mentality (among other factors).

It’s the same thing with moving averages. Stock price does not follow a particular price target because the moving average says so - the moving average is there because historical stock price said so.

If charts predicted the future, life would not have been as interesting as it is now. All chartists would have been super rich and all others would have been super suckers.

In conclusion, to me, technical analysis charts are like opinion polls - they are interesting, but generally useless. There are no patterns. Trying to establish patterns in a stock market is like looking at clouds and imagining many various shapes (animals, mermaids, or whatever you feel like imagining).

“Smoking is injurious to health” - people still smoke.

“Past performance is not indicative of future returns” - people still draw charts.

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{ 14 comments }

1 Sally 05.31.09 at 4:07 am

Hey there,

I periodically read your posts and I found this one very interesting. I believe there are patterns in the stock market though.

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2 Cash 06.03.09 at 6:58 am

Human reaction is predictable, thus some charts are helpful. The fly in the ointment is pervasive media & marketing. Media that is saturated with a certain group-think workers taints society’s perception…and delays the true indicators. Does anyone really think that this latest market rise is healthy? This was not a problem 50-75 years ago.

3 The Digerati Life 06.08.09 at 9:37 am

Hah! I was just writing about technical analysis and how much more I’ve become fascinated with it! :D wow, we come from opposite sides here. You know, I don’t necessarily put my money on the line, but I find it fascinating how this has captured the interest of many people, so much so that they WOULD put their money on the line. Well, it’s that hope that they can make money based on “analytical” interpretation.

Now, I used to poke fun at technical analysis too, and then I eventually realized it was because of a few reasons:
(1) I did not understand it.
(2) I was NOT making any money with it.
(3) I was envious of those who were making money using these strategies.

That said, I still will NOT put my money on the line unless I knew what it was I was doing. But I am now spending time trying to see what the fuss is about — I do have friends who are making money with market timing/trading, but these guys really have a passion for it and are comfortable with this sort of thing.

My only advice for anyone who insists on trying it out — don’t trade unless you can risk losing it all.

By the way — technical analysis is not a 100% guarantee and yes, it’s subject to interpretation. It can only give you probabilities. It’s up to you to make a decision based on the information you have. And it’s up to you to interpret how to proceed using the “principles”. You’d have to make sense of the “mumbo jumbo”. ;) So yes, that’s where people go wrong.

4 face thetruth 06.15.09 at 2:02 pm

face it, is GAMBLING, no one can analyzed anything based on lies and dishonesty, unless you get a tip directly from the horses mouth (inside information) “asymmetric Knowledge” lol…I can only laugh at this kind of effort to sugar covered bull crap….. unless you have enough money to manipulate the market you better off buying the lotto.

5 zulas 06.20.09 at 4:02 pm

Re: Technical Analysis - Loads Of Bull Crap And Bear Crap
I don’t agree with your opinions on the above. How can you move foreward without a plan. TA may help you to predict but it sure not 100% prefect. I think you don’t know how to intreprete the charts and your money management is weak. Stay Tuned

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7 Dividend Growth Investor 07.23.09 at 10:08 pm

I actually think that Techical Analysis is underrated and misunderstood as a method of investing/trading. Technical Analysis is not a method of predicting the future based on the past, but it is a model that allows an investor to function in a what if, then scenarios.
TA is not bullett proof however, but if you find something that works for you, then go for it.

To me TA fails miserably when identifying trends. You go long after a breakout, but then a minor price correction makes you exit and go short. As the market goes highr you go long again, and yadada ;-)

That’s why I like the slow and steady approach of buying stocks over time, diversifying my portfolio and letting my dividends compound.

8 Eugene Krabs 08.10.09 at 9:19 am

I am a fundamental swing trader who have come to the same conclusions as you have: That TA is very over-rated. I’ve also spent a lot of time debating this position with fellow traders (but mostly out of defense because being a fundamentalist, I am apparently in the minority).

But, in time, I’ve also come to see the merit of TA. Some TAs are based on some basic market logic. For example, if trading volume is extremely low, there is a possibility for stocks. If you hit a certain intra-day support or resistance, chances are good that’s because a lot of people have deliberately set trade triggers on that arbitrary point. If there is a rebound or a fall based on bollinger band or moving average, it’s because people are using those technicals to guide their subjective trades.

In other words, TA is not without merit because so many people believe in it. And if enough people believe in it and use it, then the market is going to reflect that from time to time. Like a self-fulling prophecy.

It’s quite odd for me to actually come out and defend TA, because I don’t put much stock into it either. However, if enough traders believe that– let’s make something up– 4.44% is a magic number that you must always sell or buy, then from time to time, the market is going to actually behave like that.

9 Trader 09.04.09 at 10:18 pm

Just because you don’t understand it doesn’t mean it’s useless. (I actually don’t even think you’ve made an effort in trying to understand it.) I’ve been making money based on technical analysis for years, and it does work. There’s also couple of fallacies with your with your arguments. First, you think technical analysis is supposed to predict the future. No. Wrong. All it is meant to do is tell you if you’re on the right side of the trade. Second, you think everyone would be rich if technical analysis worked. Wrong again. The truth is, VERY VERY few people actually use technical analysis, even fewer understand it, and yet, even FEWER actually stick by the rules. Those who understand it, use it correctly, and stick to the rules make tons of money. Unfortunately, people like you will never reach that level. And lastly, I buy at support and short at resistances all the time. It’s about playing the odds (something else you don’t understand). So before you bash any idea, please try to get some understanding before you make a complete ass out of yourself. Thanks.

10 Trader 09.04.09 at 10:22 pm

Also, if anything, FUNDAMENTAL analysis is highly overrated. Quality stocks can remain undervalued for years, while bankrupt companies rally to new highs.

11 mlgreen8753 09.09.09 at 11:14 am

I personally focus my attention on passive businesses outside of the stock market, but when I see a stock in a company that I am passionate about, I don’t mind investing in it. For example, I am looking at a company called Mentor Capital is is the primary funding source for a biotech company with FDA clinical trials underway for a new breast cancer treatment. Mentor Capital has a 20% claim in the biotech company and the stock is currently only $2.65/share. Because I have a soft spot for what the biotech company is doing, and I know that if the treatment hits the market there is the potential for the value of the stock to climb dramatically, I don’t mind investing my money in such a company.

12 Jafo 09.27.09 at 6:48 pm

think of each trade as a toss of a coin….if you do it at random over the long term you would tend to get equal number of heads and tails (wins and losses)…….but suppose you are using a loaded coin that comes up with heads say 75 percent of the time…….even though you still cannot predict what the outcome would be for a given toss it can be said that over a 1000 tosses heads would come up roughly 750 times……what technical analysis gives you is that kind of an edge in trading…..if you consistently apply a trading plan based on technical analysis….you can be a winning trader over the long term…..but remember that there is no guarantee that any given trade would be successful as it is impossible to predict the future……it is the failure to understand this principle that leads people to debunk technical analysis as some kind of woodoo stuff……and as for learning TA, though there are plenty of people offering courses at fat fees ( it would seem that it is much easier to earn by teaching than practising TA ), internet offers enough free resources for anyone with a bit of dedication to learn…..

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14 D' Intelligent Investor 02.26.10 at 7:58 am

I fully agree. Technical Analysis is a useless piece of crap. Warren Buffett once said “I realized technical analysis didn’t work when I turned the charts upside down and didn’t get a different answer” To succeed in Stock market investing instead of doing charts, study companies instead. Go for value investing !

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