Thursday, October 22, 2009

Fun, Fun, Fun till Daddy makes the charts work!

This chart has more than just Wednesday's bearish reversal to show. It has four reversals of prior technical signals within the span of two weeks. Is it any wonder nobody is getting it right?

This is not how it worked just a few years ago. When breakouts happened, they happened. And when they failed on rare occasion they did not turn around the next day and rocket higher.

Here is Morgan Stanley. While it did not rocket higher immediately after failing it does show a pretty good looking breakout followed immediately by a key reversal day.

To bring it up to date, look at yesterday's bar when it released its earnings. Yep, that is an inverted hammer on candle charts and rather bearish with volume like that.

Yes, chart watchers have to adapt but the rules of TA are quite different than the were.

We constantly read that technical analysis is a self-fulfilling prophecy. By that logic, so is evolution, pal. Here is the tautology (look that one up in your Bill O'Reilly dictionary). The fittest survive. Why do they survive? Because they are fit.

Stated like that I have to laugh. TA attempts to gauge the behavior of the masses. When everyone is looking at the same charts they behave the same way and TA forecasts it!

Seriously, too many people are now looking at TA and it does indeed effect it. No, it does not make it come true. Quite the opposite, it F's it up big time. The Santa Claus rally happens before Thanksgiving. How about that head-and-shoulders pattern EVERYONE saw in June?

Let's lapse into physics, something we all do when we talk about trends (inertia) and momentum. The Heisenberg Uncertainty Principle states that the position and momentum of an object cannot be known together with certainty. The simple act of observing an object alters it (measuring devices or even photons hitting it) although it really is a moot point when we get above the atomic level.

Today, there are zillions of observers on the market. They talk. They act. They effect the market. (bet you did not know I co-majored in physics in college)

Self fulfilling? Try self-defeating. We as analysts must develop new tools or risk becoming as useless as (insert favorite market goat).

4 comments:

doncove said...

You sure as hell didn't major in English:

"Seriously, too many people are now looking at TA and it does indeed *effect* it....They talk. They act. They *effect* the market. (bet you did not know I co-majored in physics in college)."

- Don

leocec said...

I've said it before, the best indicator is a failed indicator...

Quick Takes Pro said...

leo,

I agreed with that two years ago but you missed the point. The indicators are doing back to back to back failures.

Subhankar said...

Technical analysis isn't 'technical' at all. It uses a variable - price - to predict the future value of the same variable! That surely goes against the laws of Physics.

What makes technical analysis fun is that some times it does work. So does a broken clock - twice each day.

Choose individual stocks carefully. Decide entry and exit levels. Set stop-losses. Enjoy the ride. Why bother about failing technical indicators?