No. of Recommendations: 11
This article has to be the most simplistic, straw-man, dichotomous rant I have ever read. How long until otherwise intelligent, highly educated people will understand that:

1.) there is no such thing as "pure" technical analysis;
2.) that technical analysis incorporates a broad spectrum of theories, some of which (like some fundamental theories) are probably worthless;
3.) that all of us, whether we realize it or not, use technical analysis to some extent.

Technical analysis is nothing more than the study of price (and volume) in an attempt to assign probabilities to future price movement. That's it. If you've ever invested in a high relative strength stock (e.g., via the CANSLIM formula), you've used technical analysis. If you've ever scanned the list of stocks in the New Low or New High column of the Wall Street Journal, you've used technical analysis. Come to think of it, if you've ever used a price-sales, price-earnings, price-book, or price-cash flow ratio, congratulations: you've used technical analysis.

A book that Gardner et al gushed about, "What Works on Wall Street", by O'Shaughnessy, showed that one of the most powerful predictors of what a stock will do next year is what its stock price did last year: buying the 50 stocks that appreciated the most the prior 12 months and holding them for 12 months returned over 16% per annum from 1950 to 1995; the worst strategy was doing the opposite (buying those that fell the most), which returned less than cash. How can you praise O'Shaughnessy yet dismiss technical analysis?

The argument about whether technical analysis works or not is about as silly as whether markets are efficient (they are and they aren't) or random (they are and they aren't) or whether for that matter there is life after death or if light is a particle or a wave (it's both) or how many angels can dance on the head of a pin.

I would suggest to Gardner et al that you do your homework before blasting something you clearly don't understand. In the firm I work for, our chief investment strategist's technically 1-ranked stocks soared 66.8% last year (his 2's scored above 30% and his 5's (the lowest rating) lost half their value). The fundamentally ranked 1 stocks gained only 14% by comparison.

>Technical Analysis is a simple science: It states that stocks that are in motion tend to stay in >motion, that a stock that rose today is more likely to rise tomorrow.

That's true of trend-following analysts; an entire branch of technical analysis is devoted to studying the opposite phenomenon - so-called oscillators.

As per the O'Shaughnessy study and a few others, there is plenty of evidence to support this notion, at least in the short-to-intermediate term.

>It is a powerful tonic for those who are terrified by the notion that short-term stock market >movements are without rationality. Technical Analysis allows investors to say "Ignore the >reasons, they are meaningless. Focus on the patterns."

There are very few pure technicians who ignore fundamentals, but I would wager they would vastly outperform pure fundamentalists who ignore technicals. Most of the money I've made over the years I've made through technical analysis, often without fully understanding the fundamentals of the company whose stock I bought (I'll admit it). On the other hand, some of my biggest losers have been "value" stocks touted by some manager who argued that the stocks "had to go up" and were "mispriced" based on some fundamental sum-of-the-parts analysis. Maybe they were mispriced, but more often than not the stock was going down for a reason that was not yet publicly available (or appreciated). The chart told the story that the pundits didn't know yet.

>The pure technician ignores such basic concepts as stock value, price, or other fundamentals on >the belief that the institutional investors leave telltale signs when they are moving into or out of >stock, and that the "smart money" telegraphs its actions by virtue of its sheer size.
>This is a powerfully attractive theory, and I do not doubt that there are those who can practice it >with some success. But these people are not the "average" technical analysts. They are, in fact, >few and far between.

Really? Let me name you a few examples: Vic Sperandeo, who averaged over 70% a year without a down year for 14 years; William O'Neil, the founder of IBD, who turned less than $10k into over a quarter million in 2 years; Richard Dennis, who not only made a fortune and manages billions using technical analysis but trained a generation of traders to do so (the so-called Turtles); Larry Williams who turned $10k into several million in a couple of years trading commodities with technical analysis.

Sure, there are plenty of people who don't have this level of success, but there are very few successful money managers who don't use technical analysis at all. In fact, I think you would be hard-pressed to name one.

Anyone who rode the Internet bubble into the ground ought to learn a thing or two about technical analysis. But why learn about something if you're convinced it doesn't work? You remind me of the scientists who have "proven" that the bumble bee can't fly. Technical analysis got me out of tech in the spring of 2000 and into financials and healthcare over the past several months. I'm not smart enough to figure out why these things work nor do I really care. All I know is that my research and personal experience repeatedly demonstrate what so many self-declared pundits refuse to acknowledge: technical analysis, like any tool, works.


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