Sunday, May 16, 2010

Tea Leaves, Voodoo & Other Dark Forces

In the “old” days (before the Internet) the technical analyst was a true expert. Armed with only graph paper and a Texas Instrument programmable calculator they invented a new way to analyse stocks, indices and commodities. I have many of their classic publications such as the CRB Guide to Chart Analysis by John J. Murphy and New Concepts In Technical Trading Systems by J. Welles Wilder, JR.

Now thanks to the personal computer and the Internet everyone is a technical analyst with access to free on-line charts and over 200 technical studies to choose from. Our chart to-day is a tragic example of machines gone wild. This is a typical example of squiggly line madness so common to-day among industry pros who should know better. This study of Teck Resources is a candle stick daily chart accompanied by an RSI, Bollinger Bands, three moving averages, a MACD and a slow stochastic. That works out to at least 11 squiggly lines to ponder.

So here is the problem – aside from the fact that at least a million other “technicians” are looking at the same thing, these studies only work about one half the time. Look at how many buy and sell signals have been wrong. So now for a serous question, if you had serious money to manage – would you make an investment decision based on the voodoo analysis served up on this chart – or is there a better way? Over the next few weeks let me take us all back to the pure art of technical studies.

1 comment:

chrispycrunch said...

Look forward to this series. T.A. IS voodoo, but charts do have their value. It just depends on how you want to use it.

Example: I like using charts for spotting trends, reversals, etc., and from there asking why. Why has volume risen? Why was a trend not broken/has broken?