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Good morning. I want to talk about technical analysis for a few moments.
At the highest level, what is technical analysis? Technical analysis is an attempt to capture the group psychology of market traders through analysis of the aggregation of individual buy/sell decisions in several forms, the most important of which (by far) is the actual moving market price. Dow Theory people look at movements of both markets and individual stocks, look for repeating patterns, and attempt to spot those patterns as they form to make future trading decisions.
Does this work? Not really. Historically, technicals trading has yielded nothing particularly better than market average, and, on aggregate, has trailed the market rather than leading it. However, the studies of this which I've read (well, skimmed) have been done primarily in bull markets, which could be a factor.
Despite this, it's been working strangely well lately. This may be coincidence. However, let's look at a couple of other factors. First, one accounted for by technicals traders - at least, good ones: news always overrides technicals. It doesn't matter what the technical graphs say if a company announces double (or half) expected earnings. News has been consistently bad, the market has been consistently bad.
Secondly, if I recall correctly in studies, and by impression lately, where technical trading does best is in broader data sets, such as entire markets. And since the large-scale advent of the 401(k) in the 1990s and the availability of large quantities of cheap computer cycles, building market-index funds has been relatively simple and popular. This is also, in my opinion, a significant market distortion.
Thirdly, people seem to be much more aware of technicals trading, and traders believe in it, particularly lately. This could (and likely I think would) add a distortion to the market, biasing it in favour of whatever technical consensus has been reached about said market.
Finally, opacity over the last several months has increased, not decreased, in various sectors. I have been complaining about this. This reduces the amount of actual, external data available, which simultaneously increases the ratio of technicals to everything else, adding to both cause and effect of the second point.
I do not consider any of these developments healthy for the market; however, they are what they are, and as such, must be considered.
And what triggered all this is a rather long analysis on CNBC Europe - the less stupid version of CNBC, much as CNN has a less-stupid version also for Europe - indicating a 40%-ish DJIA technical rally starting mid-month. This would be a major mid-bear correction, and bring the Dow to within 75% or so of peak, before another "retest" of lows. I have been told by technicals people that the analysis appears sound.
So this is someone going out on a bit of a limb and making some long-term predictions in an area I find highly dubious but which for the reasons described I am forced to consider.
And hopefully this is the longest post I'll ever make on either Dow Theory or technical analysis.
At the highest level, what is technical analysis? Technical analysis is an attempt to capture the group psychology of market traders through analysis of the aggregation of individual buy/sell decisions in several forms, the most important of which (by far) is the actual moving market price. Dow Theory people look at movements of both markets and individual stocks, look for repeating patterns, and attempt to spot those patterns as they form to make future trading decisions.
Does this work? Not really. Historically, technicals trading has yielded nothing particularly better than market average, and, on aggregate, has trailed the market rather than leading it. However, the studies of this which I've read (well, skimmed) have been done primarily in bull markets, which could be a factor.
Despite this, it's been working strangely well lately. This may be coincidence. However, let's look at a couple of other factors. First, one accounted for by technicals traders - at least, good ones: news always overrides technicals. It doesn't matter what the technical graphs say if a company announces double (or half) expected earnings. News has been consistently bad, the market has been consistently bad.
Secondly, if I recall correctly in studies, and by impression lately, where technical trading does best is in broader data sets, such as entire markets. And since the large-scale advent of the 401(k) in the 1990s and the availability of large quantities of cheap computer cycles, building market-index funds has been relatively simple and popular. This is also, in my opinion, a significant market distortion.
Thirdly, people seem to be much more aware of technicals trading, and traders believe in it, particularly lately. This could (and likely I think would) add a distortion to the market, biasing it in favour of whatever technical consensus has been reached about said market.
Finally, opacity over the last several months has increased, not decreased, in various sectors. I have been complaining about this. This reduces the amount of actual, external data available, which simultaneously increases the ratio of technicals to everything else, adding to both cause and effect of the second point.
I do not consider any of these developments healthy for the market; however, they are what they are, and as such, must be considered.
And what triggered all this is a rather long analysis on CNBC Europe - the less stupid version of CNBC, much as CNN has a less-stupid version also for Europe - indicating a 40%-ish DJIA technical rally starting mid-month. This would be a major mid-bear correction, and bring the Dow to within 75% or so of peak, before another "retest" of lows. I have been told by technicals people that the analysis appears sound.
So this is someone going out on a bit of a limb and making some long-term predictions in an area I find highly dubious but which for the reasons described I am forced to consider.
And hopefully this is the longest post I'll ever make on either Dow Theory or technical analysis.
