Daily Speculations

 

 

Spec Forum: Technical Analysis vs. Counting

 

December 2003

 

 

Vic fired a shot across the bow regarding the value, nay the legitimacy of technical analysis. It elicited one of the best point-counterpoints we’ve ever seen on the subject. The contributors included TA notables and founders, pure quants, almatarians, down-on-the-luck day-traders,  and money managers with billions under management. We memorialize it below and invite reader reactions. Send comments to

 

J.T.: A light bulb went off the other night when I was reading in the wee hours of the evening.  I came across a story of Cortez and how after he landed at Veracruz, the first thing he did was burn his ships.  Then he told his men:  "You can either fight or you can die." Burning his ships removed a third alternative: giving up and returning to Spain.  A lot of times it takes more effort and creativity to shed myself of excuses than it does to come up with an empirically laid out speculative idea.  I have bad habits of "fundamental" and "technical" analysis and these ships are and have been my excuses for awhile.  I know I must burn these ships because they stand in my way most of the times from making the right choice.  The edge lies in the facts and this is where I can conquer and succeed. (12/4/3)

 

R.M.: I don’t want to step on any toes here, something I have a bad habit of doing at times, but to get anywhere you have to take on risk. My loss of faith in the value of technical analysis can be pinpointed to a day. I had gone to the downtown library to research how to calculate the ADX indicator (this was before everything was on the internet) [a female technician money manager] had been on CNBC that week promoting Street Smarts and had thrown everyone a bone by revealing her "Holy Grail" trade, which was to buy when the ADX was above some value after a small correction followed by a move up that broke the previous down day’s high, or something like that. I figured I’d test this system myself on a few markets. While searching for "ADX" I found plenty of articles on the inventor the indicator, Welles Wilder; unbelievable stories about the computer he sold for $300,000 that would "pinpoint major market turning points", along with myriad other scams he had pulled. I was a bit confused. How could the indicator of such a well documented con man still be in vogue?

 

Of course, the faithful are always ready with unassailable defenses. The argument, "Just because the inventor of an indicator was a con-man doesn’t in and of itself invalidate the value of the indicator,” is not illogical. But you would think the situation would at least raise a red flag or two, wouldn’t cha?

 

Anyway I tested out the Holy Grail on the markets I had data for and found that it had no value whatsoever. But then again I was only testing it on ag markets. Perhaps I was just applying the Holy Grail to the wrong markets. I’ve tested some of Tom Demark’s strategies too, which also at least have the virtue of lending themselves to testing, since they are concretely spelled out without any positive results. Again, maybe I m just testing them on the wrong markets, or over the wrong time frames. But my faith was shattered that day in the library reading about Welles Wilder. So maybe it was my lack of faith that kept these systems from ever working on my computer. After all, when something is called the Holy Grail, it surely wasn’t meant for use by heathens.

 

My quandary, though, regards [the female technician] herself. Unlike most sellers of systems and advice, she actually manages a fund and appears to have the respect of some of her peers that most sellers of systems don t have. And unless I’ve been completely bamboozled, she seems to have had a very good trading record. And since she s a swing trader, her success doesn’t fit into my theory of trend-followers’ dumb luck. So what to make of her quasi status as successful trader/vendor? (I can’t think of any other successful trader/vendors. They seem to either fall on

one side of fence or the other.)

 

One skeptical theory is this: she started out as a market maker and was very successful as a market maker, but on the sidelines has found it easier to make money as a vendor than as a trader, despite continuing to some degree as a trader. I simply have a hard time swallowing that someone who is a great trader would make their system as transparent to the public as she does. Wouldn’t that violate the theory of ever-changing cycles? I mean, if her service worked well why couldn’t a hedge fund just subscribe to it and eventually make even more money than she does by following her own strategies? I’m not looking to bash her. I realize that there is no more than two degrees of separation from her and people on this list, but I am interested in getting to the truth of the matter. I’d hate to think she’s too revered to be immune to objective criticism. Like everyone here, I’m trying to figure out how the markets work and her existence clouds my senses a bit. Particularly since she employs an indicator developed by the amazing Welles Wilder. (12/5/3)

 

 

Victor Niederhoffer: Subject: poseurs and promoters.

Date: 12/05/2003 12:14:30

 

Let us be omnivorous in our quest for knowledge and hypotheses from the like of Heiby, Merril, Wilder and female technician money managers. But let us also be skeptical of anyone who would widely disseminate a system to make money as these are subject to ever-changing cycles, and anticipation and front running by fast moving and flexible  competitors. And let us be wary of attempts by those without proper humility who endeavor to lead us down the road to ruination with suggestions that are not tested, or based on adequate research, no matter that their intentions might be good, albeit most of the time they are promoters and/or poseurs.

 

We must walk between the Scylla of excessive veneration of these idiot savants and their like who have not the tools or the inclination to keep up with modern techniques for unraveling decision making under uncertainty, and the Charybdis of dismissing proper statistical analysis of the raw data they attempt to fit lines to in their role as promoter or poseur.

 

It is helpful in this regard to revisit often the skepticism which Dr. Miller applies to such attempts even in the seemingly well regarded field of poker. (12/5/3)

 

 

Ross Miller: Now that the word is out that all academic finance research is disinformation, I'm wondering about poker theory. While guys like Sklansky and Brunson make some good points, there is a lot of bad or very incomplete advice in their books. Texas hold'em (with limits) seems like a much better vehicle for training traders than either chess or checkers. All my academic friends want to talk to me about is poker theory, but I'm not telling.

 

 

Victor Niederhoffer: In checking one's premises about the superior results of this one or that one, do not downplay that [the female technician money manager] is not only excellent as a speaker but she was very effective in trying, nay importuning, the relevant parties not to publish Practical Speculation on grounds it was not fair to technical analysis as well as other weaknesses she doubtless found. Regrettably she was unsuccessful so we had to suffer the indignity of seeing it wallow into nothingness after hitting the sales room at Amazon (it never made it onto the shelves of 75% of B&Ns as far as I can reasonably determine).  One must admire the short skirt pattern and the ilk in the context of the buzz about the superior profits. (12/6/3)

 

 

Yale Hirsch: How did you ascertain that Welles Wilder was not a genuine article and that he had definitely pulled scams? This is certainly news to me. Technical analysis is a discipline for many thousands of people. It fits the way they wish to follow the market and individual stocks. Counting may not appeal to them. (12/6/3)

 

 

Bbands: I cannot comment on Mr. Wilder's character, but "New Concepts in Technical Trading Systems", his 1978 book, provided some important tools and did much to encourage a rigorous, systems-based approach to the markets. Later he seems to have drifted into deep waters with his "Adam Theory", etc. However, that does nothing to invalidate his earlier work. Mr. Heiby is another one that seems to have drifted into murky waters after having made an important contribution that encouraged a number of people to try and move away from emotionally-based trading to a more systematic approach. Argue as you will as to the effectiveness of their tools, these men did a great deal to foster technical analysis/counting as we know it today.

 

RE: [the female technician money manager]: Many practitioners over the years have found teaching to be a rewarding and enjoyable experience. There is nothing contradictory about wanting to do both. I gather that Vic is one of those who has appreciated the rewards of interacting both with students and with the markets.

 

RE: Technical Analysis: Much of what this list calls counting, much of what is now known as quantitative analysis and much of what is now known as behavioral analysis is/was known as technical analysis at various times including the present. These labels serve us poorly. They prejudice us and keep us from exploring and exploiting potentially profitable lines. Look not to the labels or the practitioner, but to the work itself. Mr. Heiby is an example, while the systems he proposed proved to be of little long-term value, his approaches/techniques have been widely adopted/adapted.

 

 

Philip J. McDonnell: Some might claim that Technical Analysis and Counting are both based on using past price, volume and other technical market statistics to predict future price changes and are thus similar or even the same thing.  However there is a fundamental methodological difference between the two disciplines.

 

In traditional TA, charts are often used to prove an hypothesis.  Countists never use charts as a form of proof.  It simply isn't allowed.  In TA a few charts (culled from thousands?)  which "illustrate" a principle are considered sufficient to "prove" the system being claimed.  For countists the only acceptable proof is a study which uses the raw numbers themselves and tests the validity of the hypothesis using valid statistical tests. Ideally such tests would be non-parametric or bootstrap methods which do not assume a normal distribution.

 

The reason charts are eschewed by countists is that the human eye (and brain) has an amazing ability to discern patterns from visual images. Sometimes these patterns are not even there.   Perhaps the most famous example is of the two vases next to each other, which can also be seen as two faces in profile looking at each other.  Which of the two perceptions is right?  I claim the third one - the viewpoint of the countist is correct. They are simply data points - dots on a graph.

 

This doesn't mean that countists never look at charts.  I certainly look at many charts during my trading day, but I never rely on them for trading.  I use them only for a quick and dirty sense of what is going on.  From the occasional Bloomberg Grabs posted by the Chair one would presume that he glances at charts from time to time, but certainly not to prove the validity of a given trading strategy.

 

One significant problem with charts and chart patterns is that some of the well known patterns are quite difficult to define in a rigorous way. Consider defining a Head and Shoulders pattern for example.   TA presumes it is a topping pattern.  How wide should the left shoulder be in units of time?  How high in price? How high the head, how wide in time and how high relative to the left shoulder and right shoulder?  What if the neckline is sloping up or down, is there a slope that is too steep?  What should the volume for the left shoulder, head and right shoulder be and what volume for the right shoulder breakdown?  Almost never mentioned or even thought about is how deep does the valley to the far left of the left shoulder have to be? If this latter question is ignored, and it happens that the pattern occurs after a previous decline well that would also be a quadruple bottom.  So is it a bottoming pattern or a topping pattern?

 

TA would decide in hindsight that it was a top if the telltale and eye attracting triple peaks visually stick out at the top of a chart.  If with perfect hindsight the quadruple V's are sticking out the bottom the eye would classify it as a quadruple bottom and never even notice the head and shoulders which is also present.  If you look at the questions I raised above there are 12 in all.  Most of them require two answers - a minimum and maximum.  That's about 20-24 variables in all.  If you allowed me 20 variables I could come up with a simple polynomial which would precisely model any market for the the past twenty closing prices to the penny.  The Weirstrauss polynomial theorem guarantees this is true for any market from the Dow, to the prices for Patagonian sheep dip.  However the theorem guarantees nothing about tomorrow's price fitting the model, only statistics can do that.

 

To my mind that is the most persuasive argument against TA chart analysis. There are simply too many subtle unrecognized variables in most Chart analysis.  The larger the number of variables, the more data is required to prove or disprove a proposition.    To those TA types who are actually using or beginning to use counting techniques I say more power to you - you're my kind of people and I hope the market rewards you well! (12/5/3)

 

P.S. There are some good reviews of academic studies and Chair's comments on

TA in Prac. Spec. p.95 et sequitur.

 

 

Bbands: I am afraid that I have to disagree. Even a cursory survey of the literature reveals that charting is but one facet of TA. If you wish to address charting and chartists--as they call them in the UK--fine, do so directly, but you should not characterize the entire discipline for the action/beliefs of one branch. The core of your post is an ad hominem attack on TA and is indefensible. Labeling a package without a fair assessment of the contents is anathema that deprives all of dignity and knowledge.

 

 

Dave g: The fundamental difference between TA and Counting goes deeper than the failure of TA to be "rigorous" and Counting’s reliance on statistical studies.  Itis a right brain bias trader vs.. the left brain biased trader.  The artist vs. the statistician.  The TA artist will insist that rigorous definitions of patterns are not needed,  all that matters is his / her ability to INTERPRET the forming patterns that will place the odds of success in their favor.  The statistician countist, on the other hand, does not apply art or interpretation but rather hard data to place the odds of success in their favor.

 

It is an individual choice and these different philosophies are what makes the market work.  Here is a link to an interesting MIT paper on the application of nonparametric kernel regression on TA.  The results are indeed fascinating. (12/5/3)

 

http://web.mit.edu/alo/www/Papers/1705-1765.pdf

 

 

Bbands: This is patently absurd. There is nothing inherently right brain, left brain about TA and in any case the right-left brain concept has been thoroughly

debunked elsewhere. There are many rigorous technicians, including systematic types that never employ charts. If you want a stalking horse you'll have to look elsewhere.

 

 

 Philip J. McDonnell: (an open post to) John,

 

I think your criticism of my post is fair in the sense that not all people who call themselves TA advocates employ visual chart interpretation. However I think it can be fairly said that chart pattern interpretation has traditionally been one of the cornerstones of TA and still has many adherents.

 

My main issue is that most TA types (but not all!) have been content to accept a few chart examples as probative. Other issues include lack of statistical testing, guruism (where only the guru has the knowledge to interpret the tea leaves correctly) and the problem of very many variables (which can seem to fit anything perfectly).  I believe there is a culture among many in TA of accepting weak authentication and fundamentally spurious results.

 

However I do acknowledge some counter-examples to the above.  According to Prac Spec, Mr e has made money using head and shoulders patterns.  Dr. Brett practices a form of market analysis some might find reminiscent of TA.  I respect both of them and value their opinions, but both sneak some counting in as their final validation.  That is the fundamental difference.

 

John, as I have told you before I believe you are one of the pioneers in our field with your development of the Bollinger Bands.  As far as I know your use of the infamous standard deviation term on FNN was the first use of such ratings killing dirty words on national media.  I admire your courage.  My suspicion is that there was a very interesting war story behind that.  I would hope you might share that with the list some time.  I suspect it would enlighten us with valuable insights into the inherent motivations of the financial press. (12/5/3)

 

 

Omid Malekan: We spend a lot of time on this list arguing the same points with different definitions, thinking that we are disagreeing. Perhaps if we introduced some simple definitions then we could more easily reach a conclusion. For example, we can break this debate into to groups of people, countists and chartists. A countist is someone who applies some version of the scientific method to quantitative data, while a chartist relies on visual cues combined with an overlay of discretion.

 

I am a countist, and my personal experience with many chartists, particularly the kind that is often criticized on this list, is that they are mostly discretionary traders who depend on chart patterns as a tool of communication. I.e., something tells them that its time to be bearish, so they find a pattern that explains the bearishness. It is very possible for a countist to look for patterns that only verify his outlook, but a proper application of the scientific method usually eliminates that pitfall.

 

I am fairly convinced that given enough talent, experience, time and capital, anyone can make money using any strategy, so far be it from me to denounce any traders approach. At the end of the day and in the long run, only the scoreboard can decide if a tennis player has the proper swing, and only the P/L can declare someone a good or bad trader. However, there is a big difference between using a strategy to make money, and teaching or selling it to others. I may not have a problem with a religious zealot per se, but if he comes to my door trying to convert me then I will probe, counter and question.

 

I have to take issue with this idea that each approach is based on a different side of the brain or someone's artistic vs analytical skills. Pretty much anyone with either side of the brain could learn how to measure a mean or standard deviation, but that's the easy part. We already discussed how asking the proper question is far more important then finding the answer, and to that I will add picking the right answer is far more important than simply generating one. I am a countist, but for tomorrow I may have a pattern that is bullish if you look at the open to close for the last three days, but bearish if you look at the high to low for the previous day. I can't combine the two because that's just data mining and kills the sample size. So in the words of Dennis Hopper in Speed, "What do you do?" I’ll tell you one thing, no formula is going to tell you the right answer. Conversely, if one is a discretionary trader, it takes a strong sense of reason and objectivity to prevent emotions from getting in the way.  (12/6/3)

 

 

 

Dave g: it was not my intention to offend anyone with my post.  I appreciate and utilize the contribution jab has made to understanding price movement and in no way was seeking a "stalking horse". one of the original list members / founders requested that I define "parametric kernel regression" as it is applied in the MIT paper.  while O do not hold an advanced degree in statistical application or mathematics and am humbled by the quant power evident on the list, I'll do my best to answer this request:

 

Non-parametric kernel regression is simply a fancy name/ framework for producing a moving average.  Instead of looking at the last 10 and weighing them equally or saying I'll make the last one worth 10% and the previous one worth 90%---this provides the freedom to specify any number of positions and a specific weighting to each. One could, as an example, weight the fourth one back 22.2%, the fifth one 19.02 %, etc.  The weightings chosen are called the kernel.  Andrew Lo decided to use a bell curve as the kernel. One has to be aware of a deception inherent in Lo's study---he is weighting the points after the current point as much as the point before--so the study is interesting as a pure research but not much use in a real-time trading environment.  The paper provided precise definitions of TA patterns which a group I am familiar with quantified, applied a smoothing algorithm in an attempt to "fix" the inherent issue with non-parametric kernel regression and placed into a real-time pattern scanner.  Extremely fascinating application of pure research. (12/6/3)

 

 

Will: I think the most relevant question to ask about trading systems is not whether or not they work, but why they work.  This sort of knowledge allows one to see if the prevailing conditions in the market are appropriate for certain kinds of analyses. It also provides insight into the causes of market moves, instead of trying to guess what the symptoms of underlying activities will be.

 

The unscientific application of counting techniques will produce a lot of data with little predictive value, particularly if one does not understand what to count and why they should count it.  Concerning chartists, big money can make charts lie if there is an advantage in doing so -- not in highly liquid stocks, but smallcap investors should beware.

 

Zussman: Burns’ study showing that TA experts could not reliably distinguish btw real stock charts and sham random charts does not disprove that these individuals can earn abnormal profits (black swan problem).  A better test would be giving a similar group a period to paper-trade their methods and test for risk-adjusted out-performance compared to market.  Of course TA traders may also use non-TA methods, contaminating results. For that matter, one could do such tests on traders in general (ie, list members) to see if they add alpha.  If we out-perform (a near certainty), could change name to alpha list.  (12/6/3)

 

(cf the recent white paper from Pat Burns, a smart guy with AFAIK no ax to grind:

 

The Technical Analysis Challenge

 

Abstract: We report on a study of the ability of analysts to distinguish an actual price series of an equity from random alternatives.  Virtually all of the statistical tests on the results support the hypothesis that no skill was exhibited in selecting the correct response.  Many of the analysts were extremely over-confident about their ability to select correct answers.

 

http://www.burns-stat.com/pages/techanchal.html

 

 

D.F.: First, what's the point of Burns' study, and does the fact that he was able to generate random patterns (and also able to coax naive chartists into trying to distinguish between the indistinguishable) make him a "smart guy", or is there some other criterion used in labeling him as such?

 

Second, could not the same type of study be done with counting, or would that somehow be different?

 

 

Victor Niederhoffer

Subject: the scientific revolution

 

Might I suggest that the discussion we have had here in last several days about technical analysis versus counting is the best discussion of this that has ever

been held and also the same for the hunters versus the prey  in the market. Both were engendered by noting a series of defects and anomalies in the usually accepted ideas on this subject. Then a strident new idea on the subject was introduced by a few of us. It was reformulated, attacked vigorously, went thru the " It's ridiculous, it explains a lot, it deserves to be considered, let's fill it in with facts, it's completely tautological, everyone knew it anyway” process.

 

This, apparently, according to Kuhn, is the way many new scientific ideas of substance seem to evolve (albeit that should be tested).

 

I have always felt my ideas about deception being the key mechanism in markets, and this enabling the strong to prosper and the market to continue illumined in EdSpec was somewhat unappreciated and unexplored. In fact the reviews of EdSpec are almost as uniformly negative as those not written by my friends for PracSpec..

 

I wonder if the Kuhnian paradigm can be used to gain insight into trends in industry or stock rotation. Vic (12/6/3)

 

 

Dr. Brett Steenbarger: This is a very interesting idea.  The heart of the Kuhnian account of scientific progress is that the rules and understandings guiding normal inquiry (the "paradigm") are relatively resistant to change until a sufficient body of anomalies accumulate.  At that point, there is a qualitative shift to new rules and understandings (the "revolution").

 

If Kuhn's account holds for markets, investors should be relatively slow to identify anomalies in their assumptions of bullishness or bearishness for the broad market, particular industries, or individual stocks.  This would create exploitable inefficiencies in the market.  It would also fit with some of the early behavioral finance research on under-reactions to initial earnings surprises.

 

A few years ago, a chance observation by my daughter Devon led me to look at individual stocks that were making an X period low during a period of generally rising prices for the SP (and vice versa).  When there was only one such stock, it was often company-specific news only creating the lagging performance. But when several stocks in my basket of 40 were making new X period highs/lows during times of falling/rising market prices, this seemed to be a true anomaly--and it wasn't too long that the rest of the market school started to follow these "lead fish" in a trend "revolution".

 

Friday AM, on the heels of a seeming breakout around 11:30 ET, we saw such an anomaly.  The SOX and small cap stocks (SP 600, Russell)--frequent lead fish--should not be hitting new multiperiod lows in a viable uptrend.  Those seeming breakouts--the bane of system/trend traders everywhere--are beautiful examples of market deceptions that part visual traders from their capital.

 

George R. Zachar: So others won't have to duplicate my google:

 

http://en.wikipedia.org/wiki/Paradigm_shift

 

Kuhnian Paradigm Shifts

 

A epistemological paradigm shift was called a scientific revolution by epistemologist Thomas Kuhn.

 

A scientific revolution occurs, according to Thomas Kuhn, when scientists encounter anomalies which cannot be explained by the universally accepted

paradigm within which scientific progress had thereto been made. Once new discoveries are made that cannot be reconciled with a current paradigm,

and these results are repeatedly independently confirmed by other scientists, then the scientific community is forced to create a new paradigm in line with the evidence. This is a key difference between religion and science (and generally to science and other belief systems); adherents of the scientific method are generally willing to change their beliefs when new facts and compelling logic are presented.

 

Classic examples of paradigm shifts include:

 

Galilean relativity.

idea of the ether and of absolute motion.

previous ideas of space and time.

 

A common misinterpretation of Kuhnian paradigms is the belief that the discovery of paradigm shifts and the dynamic nature of science is a case

for relativism, i.e., "All kinds of belief systems are equal", so that say, magic, religious concepts or pseudoscience would be of equal value to true

science. Kuhn vehemently denies this interpretation and states that when a scientific paradigm is replaced by a new one, albeit through a complex

social process, the new one is always better, not just different.

 

These claims of relativism are, however, tied to another claim that Kuhn does at least sometimes endorse. This is the claim that the language and

theories of different paradigms cannot be translated into one another or rationally evaluated against one another; he says they are in these cases

incommensurable. This idea gave rise to a lot of talk of different peoples and cultures having radically different worldviews or conceptual

schemes--so different, anyway, that whether or not one was better they could not be understood by one another. However, the philosopher Donald

Davidson published a highly-regarded essay in 1974, "On the Very Idea of a Conceptual Scheme", arguing that the very notion that any languages or

theories could be incommensurable with one another was itself incoherent. If this is correct, Kuhn's claims must be taken in a weaker sense than

they often are. (12/6/3)

 

 

Chess Grandmaster Nigel Davies (www.tigerchess.com):

 

There is a way that technical analysts could be tested. Sit them down, showing them one bar at a time with different sorts of data; some of it genuine (but multiplied by a constant and with dates changed so that it is not at all recognisable) and some which is randomly generated. Ask them to write down buy and sell decisions as they work through the data.

 

Over enough samples they should produce superior performance with the 'real' data if their claims are valid. (12/6/3)

 

 

Fitz: You are all railing at windmills with this pointless exercise. The goal of trading is to make money. Period. It should not matter whether the data is real or random. And no one has answered my question with respect to whether a similar study could be done with counters, using random sequences of numbers. My contention is that even the most competent counter could not determine, using the most sophisticated mathematics and quantitative methods, between a real series of data, and a randomly generated series of data.  as such, this entire exercize is nothing more than a shallow self-fulfilling pipe dream to disprove the efficacy of a methodology that stubbornly refuses to die.  There are undoubtedly lousy chartists who are losing traders.  They just don't admit it.  But the same must certainly true for counters.  (12/6/3)

 

 

John Lamberg 

 

>...my contention is that even the most competent counter could not determine, using the most sophisticated mathematics and quantitative methods, between a real series of data, and a randomly generated series of data...<

 

By inspection?

 

Dr. Theodore P. Hill asks his mathematics students at the Georgia Institute of Technology to go home and either flip a coin 200 times and record the

results, or merely pretend to flip a coin and fake 200 results...

 

http://256.com/gray/info/benfords.html

 

 

Nigel Davies (www.tigerchess.com)

 

I think this EXPERIMENT would be quite revealing. And countists could be tested similarly, given 3-5 years of 'data' and then asked to trade the same 'market' thereafter, but not knowing if it was a market or a series of random numbers. 

 

Of course we don't know if the exercise is pointless unless it is actually conducted. The goal of trading may be to make money, but this can't be accomplished

just by stating it. A METHOD is required. (12/6/3)

 

Fitz: Here is my last word on the subject, and then I will go back to the sidelines where I belong. The experiment would not be revealing at all because of the human element. Again, there are good chartists and countists, and lousy ones.  This debate can go on ad infinitim, with no resolution. Of course, all on this list know the answer. Countists would reign supreme.  A frequent poster on this site has said as much ("a near certainty" if I recall correctly -- so much for quantifying things).

 

imvho, much on this list is self-congratulatory heat, not light. I gratefully read because every once in a great great while I learn something of use.  But it is usually from the same suspects...jab, yale...and even from mr e. I disagree with Vic's praise for the recent string on TA. I think it reveals a complete misunderstanding for how it is used by those who use it effectively and profitably.  Instead, it appears to be the subject of conversation by those who are failed chartists. Back to the sidelines for me.   (12/6/3)

 

 

J: For what it's worth I don't see a major differences in the kinds of data that the typical technical analyst uses versus a counter. The difference as far as I can tell is primarily in methodology.  The counter seeks to understand the prospective expectation around a proposed price pattern/event by testing it historically, by hand, or with a computer. However, the patterns for both are often some formulation of price action.

 

We have worked with many chartists/TAs, trying to help them quantify their patterns into systematic rules.  Our most typical finding is that the chartist has trouble quantifying the pattern they believe they are trading. In a typical example, after a chartist gave us all the conditions to test for his methodology (which was as I recall about 10 separate qualifiers) - it only traded a few times a year (an intraday pattern). Obviously the person was doing something else in practice than the rules they described to us (the person was purportedly profitable as well).  This forces the chartist to  test through actual results (assuming they can't verify their methods historically - and if they could to me this transforms them into the category we call counter). 

 

To me this is a big disadvantage for most Chartists, and lends itself to cherry picking the historical results that fit the desired outcome. The quant or counter knows that only 1 out of 100 (perhaps much less) ideas will pan out historically, not to mention prospectively.  While it's tough to know if a pattern will work, it's helpful to know if it ever worked.  If you can get the Chartist to define the method(s) you can test and at least know the latter.

 

 

 

Big Al: I think you're touching on a very important point:  To what extent do traders of any persuasion actually do what they say/think they are doing?  Versus: To what extent do we react emotionally to specific situations and then rationalize it later into a strategy?

 

 

Nigel Davies (www.tigerchess.com)

 

I must admit that I would also have great difficulty in giving you the 'rules' for why I make a particular chess move, so inevitably I have some inbuilt tolerance for methodologies which are difficult to define. There again, the chess world has a huge advantage in transparency in that we have ALL the results and ratings published, and most of our games too....

 

So I don't understand why there are all these discussions about which methodology is valid; if people claim they can make money from the markets using a particular methodology, then let them show it by either making their trading statements/results public, publishing their predictions or entering into an experiment such as the one I have described. If they do this they have my greatest respect, if not I figure they're just wannabe gurus who want some cash to explain what they can't do.

 

Does anybody have right to exist in the investment business if they perform worse than a tracker fund? I wonder what people would think paying for my chess lessons if I couldn't beat a random move generator!?  (12/6/3)

 

 

Adi Schnytzer: Nigel's idea seems right to me. Give a group of chartists and TA folk a hundred series of prices and volumes and get them to predict. Until it's been done, we simply won't know which works. (12/6/3)

 

 

Charles Pennington:

Subject: Take the Challenge

 

Technicians, chartists, countists, Ba'al-worshippers, step up to the plate.

 

Attached is:

 

1) a plot, and

2) an text file

 

each containing 3 years of daily closing data for both a real MYSTERYSTOCK, whose identity will remain a secret (though it is heavily traded and on the NYSE),

and for SIMUSTOCK.  For SIMUSTOCK I generated the daily changes in a purely random way, so that there should be no predictability, but beyond that I won't

tell you.  I did not attempt to make SIMULASTOCK look similar to MYSTERYSTOCK except that I tried to make the magnitude of their typical daily fluctuations the

same.

 

I haven't labeled which one is MYSTERYSTOCK and which one is SIMUSTOCK.  The data sets are just labeled as "1" and "2".  Those bold enough to take the challenge

have to decide which is which.

 

GOOD LUCK!

 

 

Brian Haviland 

Subject: Take the Challenge

 

OK, I'll put my foot in it. Data set 2 "looks" more like a real stock to me. Obviously I'm coming from the chart approach.

 

 

Phil McDonnell: Countist that I am I used the head and shoulders approach to get my answer.

 

 

Ken Smith

Subject: Take the Challenge

 

Whatever is beyond the chart on the right-hand side is in the dark.  It cannot be seen.  However, other things are going on in the investing/trading

environment that will impinge on the last data point.

 

It is not just that last data point that is definitive for our solution. Take an example.  If this is a gold chart what is the dollar doing, what is

inflation doing, what is current interest rate environment, what is public sentiment, what is Fed policy, what wars are going on, how is oil doing, are

beans in a crisis, are there droughts across the land, do we have high employment, low employment, is the investment community under attack from

government legal sources, are there scandals, is Soros in heavy on this item, who is the ax.  And so on.  Then a better prediction could be made -

not by me, but by some of the sophisticated, talented, bright participants on this list.

 

 

Charles Pennington

Subject: Take the Challenge--We have a winner

 

The winner of the challenge is Alix Martin, who I think would be considered a countist.  I won't reveal yet how he did it, because I want to give those

remaining a chance to come in second and third.  But I'll reveal that apparently it was easy for Alix, for him somewhat like choosing between the real da Vinci

Mona Lisa and the Warhol silkscreen version.  I learned a lot from his explanation of how he did it, which I'll eventually post (unless he'd prefer

otherwise).

 

The first column of numbers is random in some BAALWORSHIPPING sense. The second is not quite. At least that's what I figure, making 2 the MYSTERYSTOCK. If I am right, I will be happy to explain how I did it. If wrong, I will quietly hide in the corner!

 

 

Charles Pennington

Subject: Take the Challenge--Final Challenge Results

 

Data set 2 was MYSTERYSTOCK, and it was Ford.  Data set 1 was SIMUSTOCK.

 

Congratulations to Brian Haviland, Alix, Adi, and Alex Castaldo!  Of these 4 Brian is the lone self-proclaimed chartist.

 

One respondent gave an incorrect answer, but he acknowledged that he was guessing tentatively.  He thought that DataSet1 was more aesthetically pleasing

and suspected that it was the real stock.  Lesson: stocks are ugly.

 

Alix looked at, among other things, the behavior of the two "stocks" immediately following big down days, declines of more than 5%.  Ford/MYSTERYSTOCK/DataSet2 had, on average, a nice recovery following 5% drops, but SIMUSTOCK/DataSet1 followed with random behavior.

 

There were no responses from aeiethieeiestic Baal worshippers or NPR pledge-week contributors.

 

I'm planning another Challenge for the near future.

 

 

Alix Martin: I also looked at the histogram of price changes for both datasets. The first one was very symmetrical, apparently doctored to match the stock's

average return and standard deviation. The stock's data was more natural looking, with fatter tails, asymmetry, and a rough looking distribution. The excel file with the histogram is available on

 

http://alix.martin.free.fr/speclist/Challenge.xls

 

Thanks Charles for an interesting experiment.

 

 

Adi Schnytzer 

Subject: Take the Challenge--Final Challenge Result

 

I have just realized that the Ford residuals' behavior demonstrates that there is heteroskedasticity in there; i.e., that the volatility is not

constant. I guess Engel deserved his prize!!!

 

 

 

Yale Hirsch: John Wiley publishes the work of Thomas N. Bulkowski and in his "Trading Classic Chart Patterns" and his "Encyclopedia of Chart Patterns" he provides a

thorough and statistical assessment of all the various chart formations. I had never seen this done before. A review appeared in the 2003 Almanac. Also, are we technical analysts when we are on Yahoo and enter a stock symbol and then look at price action on its chart for today, the last three months or five years? Technical analysis is used by all of us to some extent or other. When the chair predicts we will likely see 10000 on the Dow before we see 420 on gold, isn't that sort of a technical prediction?

 

 

Nigel Davies (www.tigerchess.com):

 

It may be impolite of me, but I'd ask Mr Bulkowski if his results could be independently verified and then I'd want to see his trading statements...

 

There are one or two guys who claim to be good chess teachers despite having low/non-existent ratings. They talk 'authoritatively', but then they don't seem to be able to apply their brilliant teaching methods to their own game! Usually they figure out some excuse such as 'retirement'. I even know one chess teacher who claims that he doesn't play because he's worried about becoming paranoid!

 

I saw an interview with Van Tharp once in which he made out that he was a great coach but it just so happened that he didn't trade. And my respect for him went rapidly to zero...  (12/6/3)

 

 

Hany Saad:  Let me suggest a fun nonscientific way of testing technical analysis` premises from someone who took and passed the three levels of the chartered market

technician exam before deciding for good that the backbone logic on which all TA premises is based, namely "the trend is your friend" is inherently flawed...

 

The idea occurred to me one day crossing the street as the signal was flashing "Don’t Walk" while I was daydreaming (a too frequent occurrence) by mistake in

Paris in one busy street. To my amazement all pedestrians followed blindly without checking the light either with cars honking behind me in a chaotic scene.

I was so amazed by this coincidental finding that I spent the rest of the day playing this game (crossing on a Don’t Walk signal), getting the exact same result.

 

The moral of the story is that it’s human nature to follow the leader. People feel more safe in company.

 

What the hell does this have to do with TA??? 

 

Throughout history, wealth distribution remained in the area of 20 to 80 with 20% controlling 80% of the wealth and vice versa. While the mkt isn’t a zero sum game as you undoubtedly all know due to the vig, the aggregate wealth sure is. Now, all the people in the 80% (the majority) league must be part of a herd and must be taking the other side of those in the 20% league by doing something COMMON like FOLLOWING THE LEADER-- "me" in the case of the “Don’t Walk” signal, or buying while others are on up days and selling while others are on down days a la Mr Livermore in the case of markets. This is clearly a case where the herd loses to pay the vig, the friction costs

for market upkeeps and the 20% handsomely.

 

What i am trying to say here is that people by NATURE are trend followers which puts them in the majority league which puts them by definition on the losing

side.

 

Consider this: Contrary to popular belief, cougars are the most successful predators of all...not lions, not wolves. While cougars differ widely in their hunting techniques, they do not lurk in the treetops waiting to ambush passersby....they hunt on the ground and ambush their prey from behind...they are generally nocturnal and solitary hunters...the success of the hunt depends solely on the element of surprise... they are classified as a stalking predator rather than a pursuit predator like the wolf...a fatal bite below the base of the skull, resulting in a broken neck, is their preferred method of killing prey...it very likely for a person to live in the same area as a cougar without every seeing one...while scientists attribute the cougars’ success to physical abilities and techniques, I suspect that SOLITUDE in the hunt is the main reason for a cougar’s success. A lion on its own can hunt more successfully than a herd of lions. This is another example where being a member of a herd (a trend follower) can put you automatically on the losing side.

 

One way to make a devoted technical analyst lose faith in TA is to play his own game (which I did with floor traders). TA books are loaded with specific examples proving certain specific patterns like head and shoulders, ascending triangles, blah blah, ignoring the rest of the sample where the same specific patterns clearly didn’t work. It’s easy to generate countless charts with specific past dates where the trend was clearly in a certain direction before reversing abruptly: Make sure the trendline isn’t too far away from the 50- or 200-day moving average (a major objection by technical analysts that it’s a sign of reversal). Stop the time frame on the chart right before the reversal and ask a technician to give u a prediction on the chart. Then show him the chart in real time. While this experiment is in no way scientific, it’s only fair to play an unfair game the unfair way.

 

 

Philip J. McDonnell: Sorry, I couldn't let this one go...

 

Hany wrote:

 

>While the mkt isn`t a zero sum game as u undoubtedly all know due to the vig, the

aggregate wealth sure is<

 

The market and wealth are variable sum games.  As the market rises wealth is created out of thin air.  Wealth evaporates when markets fall. 

 

Microsoft has around 11 billion shares outstanding.  When MSFT rises by 1 point $11 billion in wealth is created.

 

Otherwise Hany great post, I especially liked your street crossing discovery - very enlightening.

 

 

Debashis Basu:

 

Might it be useful to consider that our entire focus should not be on discussing systems or methods that work, but on what do we do in a live situation when we find that a pre-tested pattern (TA or counting) is failing. WHEN do we determine that failure and WHAT do we do about it? Take the small loss or double up on the other side?

 

There are 1,000 times more advice in the world on WHAT to buy than on WHEN to sell. Similarly, there is more discussion on what TA patterns and counting work

than on what to do in case they don't.  

 

Out of this, is there a third way possible, one that focuses more on the point of failure of a method rather than its success? In other words, if we know when

the system failing and take the loss, so as not to be part of the 80%, will we enter the select 20% riding on the shoulders of sheer randomness -- NO MATTER

WHAT the method was? 

 

 

 

David Higgs: Do you call it a "cycle change" when tested pattern no good anymore? Who got wise when your share of chip allotment exceeded..."X"... as there always seems a tendency  for to keep investors in the 80% group...........Yes, where is......... "here's how ya do it"................... isn't is a simple thing?

 

And for those that walk when sign say don't walk, well they the ones that probably belong in the 80% group. (12/6/3)

 

 

Victor Niederhoffer: Subject: to call a spade a spade

 

So we don’t get lost in forest for the trees, let us recall that many technical analysts are charlatans who don’t have a clue as to how to trade. They encourage

others to overtrade and sell worthless systems, thereby creating much misery and dead weight cost. There is such a large random component in stocks that is

extraordinarily difficult to tease out a method of making money from it. Certainly the nonsystematics of the vast majority of technical analysts not sufficient to

beat buy and hold. After a period like this year when throwing darts at any low-priced stock with insider buying made 75% or so, many tend to forget that just

by being long, one has to make money over most periods. Then the technicians who say make 10% in a year like this on average, give back hundreds of billions, but still can mount the bully pulpit and pretend some semblance of utility.  You see, “They're the ones that know what they're doing," not the unwashed. Vic (12/6/3)

 

 

Ross Miller: Technical analysts are the Ramones of the financial markets. (12/6/3)

 

 

Robert Mahan: Subject: Punk finance.

 

I take issue with your insult of the Ramones. The Ramones may not have been great musicians, but they certainly weren't phonies and neither deceived themselves nor others as to their abilities. I'd say technical analysts are the Yanni of the financial markets.

 

 

Craig: Subject: Punk finance

 

In fairness to all wouldn't they be the MILLI VANILLI ???

 

James Altucher: In terms of TA versus counting I really wonder if the argument is simply entertainment. I don't really believe either side. Do countists take money from the TA-ers? Does TA take money from the fundamentalists, as Dennis asserts in market wizards? Do the lucky take money from the unlucky, as Taleb suggests? Has a bear ever built a mansion on Fifth Avenue? These questions certainly line the pockets of GE (in their position as owner of CNBC) but nobody else.

 

In the spectrum of fact on one side and fiction on the other we only really know two things on the 100% fact side:  a. you will never lose money in the stock market if you never invest in stocks. b. everybody who invests in the stock market occasionally (some more than others) loses money.

 

While we know that a financial time series in general subscribes to the properties of a lognormal distribution and hence statistical testing can be of some use, we also know that at unfortunate moments this relationship breaks down and goes from poisson to poison for its practitioners. For me, the benefits of counting is in the construction of a plan. When everything goes according to plan and the counting works like magic (since ultimately science = magic in the eyes of a child) then all is good. When things don't go according to plan, then one can get the hell out - the world has become different from the past. Having a plan, to me, being ultimately more important than the method of construction. That counting is my method I feel strongly about, but religion is a personal choice.

 

We can see from the IASG site that the real key to success is not the method but the staying power. How many of the funds tracked on that site suffered disastrous losses even in their early years, only to stick around, persevere, and five years later end up managing a billion or more. (Roy Niederhoffer’s 33% loss in 1999 comes to mind. I'll be honest and say I don't know if I have the psychology or the temperament to have been able to handle that and yet here he is, today, managing 10 times as much as he was managing then. To me that is admirable, not necessarily the method used to get this year's 5% return). 

 

But, as my daughter Josie told me this morning, "4-year-olds know more than daddies." And I have to assume she is right.

 

 

Victor Niederhoffer: There is a bit too much stridency in the recent posts about technical analysts pro and con. Taussig always said that there was a degree of congestion in prices near the equilibrium but when prices passed the penumbra there were tendencies to continuation. Cowles expressed this as a microscopic tendency to

reversal and a macroscopic tendency to reversal. In some of our recent work, we have found that markets can be modeled as victims of an epidemic with

susceptibles, and immunes. After a certain period, markets become immune.

 

Good tests for all these can start with Leo Goodman’s work on movements and comovements between dependent time series. (12/7/3)

 

 

Yale Hirsch:

 

I don't see how there can be a legitimate conversation on technical analysis without a definition of terms, which are then agreed upon by both combatants.

Also to be considered is that there are those that may have a proclivity to one discipline over the other. Other considerations are the natural intelligence one

brings to the table and the willingness to work hard and spend years developing the tools of whichever trade is chosen.

 

There's no real reason for one group to be intolerant of the other. There are always charlatans among every group. What were the recent "market timers" in

mutual funds who have disgraced us all? Were they TAs or countists, or just thieves? I would have thought I would be seeing a fantastic quote by Henrik

Ibsen written a hundred years ago repeated time and again in this climate:

 

"Those heroes of finance are like beads on a string. When one slips off, the rest follow."

 

Does anybody have a definition of the two disciplines that we can all agree on? If not, we should move on. (12/7/3)

 

 

Big Al: Here are what I think are some basics.  Please educate me:

 

A Fundamental Analyst looks at company numbers and market information and the economy and global politics and whatever else, and then condenses all that

information down into an order to buy or sell some order size of stocks, options, futures, bonds.  When the Fundamentalist places his order, his decision

is stripped of all the information that went into it.  The market receives only price and order size.

 

Efficient Market Theory says that all the analysis done by all the buyers and sellers of a given security (or commodity, etc) is reflected in the data points comprising the current spread for that security.  Weak form EMT says that no additional advantage can be gained from studying historical price/volume data.  Now, however, even Sharpe admits there is evidence of price momentum at certain times.

 

Both Technical Analysis and Speculation ("counting") work on the implied assumption that, traders having sent signals to the market with buy/sell orders, the market sends signals back to the trader via price and volume data, and that this price and volume data can be analyzed to provide new information predictive of future price moves.

 

Speculation allows that most of the signals sent out by the market are simply noise.  However, one may be able to spot "tells" or temporary patterns that indicate some underlying dynamic.  Perhaps some particular group of securities always loses about 3% the week before each Fed meeting, and then regains the 3% the week after the meeting, no matter what the outcome of the meeting.  This indicates an underlying reality, that some big players are lightening up before the Fed and then reloading afterwards.  Speculators know that as a pattern becomes widely known, it should be traded away (ever-changing cycles).  Also, the underlying dynamic may simply change.

 

Technical Analysis seems to believe that the signals sent back by the market are much richer in information and also that many interpretations of those signals are true most or all of the time (i.e., not traded away).  So, resistance/support, head-and-shoulders, breakouts, etc., are valid from stock to stock and from situation to situation.  However, most TAs argue that their analysis is simply a tool and takes experience to interpret correctly.  Whereas the patterns that Specs look for should be traded away as they become known, TA should work in the opposite fashion, i.e., TA should have at least some self-reinforcing qualities.  For example, the more people believe in

support/resistance, the more of a support/resistance "effect" one is likely to see.

 

 

Adi Schnytzer: And, of course, if you believe in the efficient market hypothesis then Charles's puzzle is silly because there should be no difference between real share prices and numbers going on a random walk with or without drift! The reason I believe markets are inefficient and that the inefficiencies are NOT bid away quickly are several:

1.     Not all traders are rational and different biases give rise to different free lunches among those who aren't beset by them.

2.     Not every one have equal ABILITY when it comes to data analysis, be it econometrics, counting, TA, studying the books, whatever. Thus, we will

all come to different conclusions about the identical data sets. Why are there bulls and bears out there?

        3. We don't have identical data sets anyway.

        4. And even for the same degree of 1, 2 and 3, we won't have the same amounts of money. There's no point telling me that I can gain a net

pure arbitrage of 0.001% on a certain deal if I only have $1000 to invest. I'd be wasting my time.

       5. Inside information matters and ultimately destroys the efficient market hypothesis.

 

 

Victor Niederhoffer:

 

The Don de Almantaria proposes that we define technical analysis before positing that it is mystical and pseudo science or a valid technique that simply cant be quantified. I google under “technical analysis definition” and came up with the first 7 definition based on the google analysis. I give each of the top 7 below. The first  one captures the essence of all of them: TA is "a method of evaluating securities by relying on the assumption that market data, such as charts of price volume and open interest can help predict future market trends. Tools used by technical analysts are advance/decline line, head and shoulders, moving averages, point and figure charts, resistance, support analysis ascending bottoms, descending tops, Eliot wave theory, momentum indicators, MACD, on-balance volume, trendline, vertical line charting, arms index, double top breakout, triple bottom, Bollinger bands."    

 

Alternate definitions:

 

1.     "Technical analysts are market timers who believe that trends once established have a tendency to continue until something occurs to change the balance of supply and demand.”

2.     “Technical analysts are market observers who believe that the 50- and 200-day moving averages form lines of resistance that are difficult for a stock to penetrate

on the way up. Once these lines of resistance are penetrated, however, technical analysts believe that stocks have a clear shot at rising toward new highs."

3. Technical analysts believe that trends once established have a tendency to continue until something occurs to change the balance of supply and demand. Tech

 analysts use charts to uncover price and volume patterns. Indeed. "TECHNICAL ANALYSTS RELY SO HEAVILY ON CHARTS THAT CHARTIST AND TECHNICIAN ARE OFTEN USED

SYNOMYMOUSLY.”

3.     The Society of Technical Analysts gives diploma and defines TA as”  "TA's believe that the balance of supply and demand  is the root of price setting. A thing is worth what it can be sold for. The averages discount everything.... their taxonomy is bar charts, gaps, islands, moving averages, candle charts, Dow theory , chart patterns, e.g., triangles, flags, pennants....” Also, from the Society’s trading glossary: “Technical analysis a pattern that results where a stock price reaches a peak and declines, rises above its former peak and again declines, and rises a third time but not to the second peak, and then again declines…. TAs generally consider a head and shoulders formation to be a very bearish indication."

 

Based on this, charting and trends continuing would seem to be common to all of them as well as the techniques such as Eliot waves listed above. And yes, I claim that all this is mumbo jumbo, that none can possibly come up with valid predictions above chance from such desiderata, and that the only hope for anything useful from the above is to state a hypothesis, quantify something, starting with the standard statistical tools such as serial correlation, and runs, and then to test the hypothesis, ... then to take account of how to revise it, then to try to understand the factors that would prolong its ever so miniscule departure from randomness. Vic (12/7/3)

 

 

D.B.  I'll add my $.02 since I know TA and a little bit of math/stat. (BA Econ., BS Math).

 

I'll respectfully disagree that all of TA is mumbo jumbo. I'll agree that some (maybe most) of the generally accepted ideas of TA (see books by Pring, Murphy etc.) are too general to be useful as trading systems capable of generating buy/sell decisions, and the results of using these methods aren't reproducible (i.e. interpretation of chart patterns).

 

However, in my opinion, TAs do have a lot of tools (mostly price derived indicators) that can and should be analyzed scientifically. I think it would be a mistake to classify all of TA and mumbo jumbo and dismiss everything as such without first taking a scientific look at each piece. I know Vic has probably done more of this testing than most people and am glad to see his results in his books. He has helped open my eyes...

 

FYI: I begin work on my MS in financial math next semester. I am making the transition from a TA to a QA.

 

 

Mr. E: I have watched this discussion for a while and allowed all sides to express themselves like the other major capital market bonds, equities also has it own term structure...and in a few minutes I’ll describe this concept which explains all the confusion between those who want to deride TA and those who don’t.

 

By way of history, I have watched the changes in money management styles for over 35 years, from the perspective of several major league buy sides, bulge

bracket sell sides, and of course many years at a world class performing hedge fund.

 

I began my career in the employee benefit trust at Bankers Trust in the late 60s, which parenthetically was then the 2nd largest pension fund manager in the

world, and I can report that senior portfolio managers with high irregular pension contributions from the entire ATT, IBM, Standard Oil of California/New

Jersey/Ohio and other big funds USED TA for timing assistance of what new oe existing positions to add or initiate… And further THEY INVITED Shaw from Smith

Barney and ONEIL who subsequently founded INVESTORS DAILY to give regular presentations to the entire pension and personal trust portfolios and analysts.

 

The point was that, no matter what data may have been available academically to undermine the credibility of TA, the PRACTICE of the most sophisticated VERY

LARGE MANAGERS was to be guided by the charts and its various forms ...

 

The term structure of bonds is nothing more than the CAUSE of the SHAPE of the YIELD CURVE, now and in the future...the forecasting technique to determine the

term structure is simple and yet highly complex...at every point on the curve, say the two-year area, and the five-year area, WHATEVER dominant part of the

customer base, say property and casualty companies that have positive cash flow at that time, well this cash NEEDS TO BE INVESTED, and if it is more than the

available supply of new or second hand bonds, THEN THE YIELD CURVE will INVERT AT THAT POINT  UNTIL THE INDUSTRY IS OUT OF CASH...alternatively, if the US Ttreasury or Fannie Mae were to finance a huge deficit at an average life of say 10 years, well the curve might BLIP UP if there wasn’t the cash flow from real or

sovereign money investors...

 

Fast forward to stocks, if the majority of active managers read charts and listen to TA analysts, and if they use those approaches to time stock purchases (and it is mostly buying by the way not selling) then over time the market because of the utilization will develop patterns that irregularly can be mined for profit.

 

But just like the bond market, when the segments of the stock market who create these patterns RUN OUT OF CASH, so to will the BLIPS in the term

structure of bonds and stocks quickly disappear...

 

We have 22 years of running models that have produced excess returns across the macro world of stock bonds currency and commodities which means that TA is used by almost all classes, except INDEX PLAYERS, who will either extend or detend a TA anomaly...

 

To the extent that academics try to PROVE that TA isn’t important is WONDERFUL, because in the real world TA is almost required knowledge among the BIG and market moving segments of all markets...

 

The reason that TA appears to be random has more to do with the TERM STRUCTURE changes.

 

 

Steve Wisdom:  I'm hesitant to weigh in after hearing from the likes of Chair, E, & Charles, but I have a bit of personal experience.

Not too long ago I worked at a dignified Wall St firm under a trader who read charts.  He'd often make statements of the form 'XYZ has a good story.. but the chart is horrible!', or 'ABC has a great chart.. I'm getting a woody!'

 

And his 'read' on the chart would be shared by nearly everyone he spoke with, buy- and sell- side.  Indeed I was embarrassed to be unable to apprehend at a glance whether a chart was 'good' or 'bad'  So I think (1) 'visual analysis' is alive and well, and (2) there's a rough consensus among experienced technicians as to how to read a chart.

 

The unanswered questions are (1) whether chart-reading is really just shorthand for an effect such as 3- 6 month momentum that's been written of by academics and popularized by Haugen, Singal and others, and (2) whether there's meat on those bones anyway, in light of changing cycles.

 

ps/ As the years go by on Wall St the colorful old-time chart-readers are gradually giving way to faceless quants.. After they're all gone, I think Chair will miss them.

 

 

M.K.: Of course Technical Analysis doesn't work in any systematic way. But then fundamental analysis doesn't work that way either. If it did you wouldn't be able to replace 70% of fund managers with chimpanzees without anybody noticing any difference (except possibly their spouses).

To wax epigrammatic, TA may be said to try to predict the events of tomorrow by studying what people are doing today while FA tries to predict what people will do tomorrow based on the events of today. I have no axe to grind either way though I suspect many are drawn to TA as a way of providing false certainty, as a kind of pseudo religion. In evaluating its techniques, as with any strategy, one has to be aware of asymmetric payoff - it's the expectation, not the probabilities that are important. A method might work nine times out of ten but the tenth time gives it all back and more.