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.