Technical Analysis of the Investment Markets

by Silicon Valley Blogger on 2009-10-2827

Musings on stock market investing.

I was indulging my regular surfing habit and came upon yet another insightful observation by Monevator, this time, on the (de)merits of technical analysis. I’ve found that many bloggers and investors of my persuasion are usually critical of technical analysis, especially as we’ve embraced index investing, asset allocation and passive or long term investing as the prudent ways to invest. But since I’ve begun blogging about personal finance, and have the opportunity to read countless financial and investment articles and posts on a daily basis, I’ve come to relax many of my opinions and views about finance. In the case of investing, as with many other topics, I’ve begun keeping a more open mind.

Monevator is of the camp (along with one of my all time favorite bloggers, Golbguru, who’s been sadly quiet of late) who thinks that technical analysis is a bunch of mumbo jumbo, or as one of them says, “a load of bull and bear crap”. I suppose it’s because it seems much like reading tea leaves: check out a bunch of charts and wield a ruler and voila, you’ve got some answers! Seems a bit far-fetched maybe?

Japanese candlesticks
Image from Free Forex Signals

Thoughts On Technical Analysis of the Investment Markets

For me, the jury for this kind of investing analysis is still out. I may want to expound on this another day, but for now, I’ll say that I like to spend an inordinate amount of time at online broker sites, reading the investment forum chatter and “dabbling” in a little trading and technical analysis. I haven’t particularly discounted this form of analysis completely. In fact, I’ve been studying it for the sake of seeing a different perspective on investing, and have picked it up to try to understand current and past market behavior. As far as trying to predict the future based on the past? It’s all guesswork of course, but both stock market technical analysis and fundamental analysis attempt to provide perspective about what may potentially happen down the road with a given market or security.

I actually lean on both approaches (with varying degrees of confidence) along with a whole lot more (intuition included) in order to determine my next moves for my investments. And while I don’t rely on technical analysis exclusively as a way to make money off the markets, I believe I’ve become a better investor and have learned a lot more about how any market works, thanks to getting a little bit more educated in the concepts used by short term traders and active investors.

The point here for me is whether technical analysis can “help me with my game”. I think it has, but not in the way you’d think, since I don’t trade that much. I’ll just have to say “it works for me” in so far as providing me additional knowledge about how the various investment markets work and how investors and traders “play” in this universe. I pretty much use it for the educational value. I just view it as a way to get a big picture read on investments and a nice way to try to gauge market sentiment.

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{ 27 comments… read them below or add one }

Financial Samurai October 28, 2009 at 10:37 pm

I will honestly say that technical analysis is a bunch of hogwash. People talk about technical analysis b/c they don’t know how to do fundamental analysis.

“Head and shoulders”, “cup and handle” , bollinger bands, blah blah…. it doesn’t really matter. Every day, you have a 50% chance of getting it right or wrong. You can attribute your win to anything you want, be it flipping a coin, technical analysts or what now.

That’s my 2 cents πŸ™‚

Silicon Valley Blogger October 28, 2009 at 10:51 pm

Financial Samurai,

Somehow I knew you’d say that! I hear this all the time actually. It’s what most fundamental analysts believe of course. But I’ve argued about this a bit with staunch technical analysts I’ve had the pleasure to know; I’ve had the great fortune to work at a bank and at a brokerage in a past life, and there was no shortage of people who enjoyed day trading and who did fairly well with this sort of approach. Most of them were expert software engineers and mathematicians and had a huge talent manipulating numbers. I somehow vaguely recall them telling me: People say technical analysis doesn’t work b/c they’ve never succeeded with it.

Is this a case of fearing or disparaging something we are not familiar with? Or is it really hogwash? πŸ™‚ Well, I give everything the “benefit of the doubt” and try to give something a whirl when I can. As I said, I would not risk a whole bunch of money doing this as I admit that I am no expert at it and I am a moderately conservative investor (I know my risk profile), but I’d do it for the education and maybe even the thrill of trying something out with my “play money”. As traders say — start very slowly and when you build confidence and get the hang of it, do more. They play in their space, we play in ours, and sometimes we overlap….

But clearly, this is NOT for everyone, just for those who understand the risks and who obviously don’t subscribe to it being hogwash πŸ˜‰ .

But let’s not forget that prudent investing is still the way to go, and the core of anyone’s investment portfolio should be in long term investments, IMO.

For the record, here are some of my other opinions and observations on making money through day trading.

kenyantykoon October 29, 2009 at 1:18 am

@ Financial Samurai, tell george soros that.He might not think that it is hogwash since he has made a boatload of cash. he is at the top of the technical analysis game.

Rob Bennett October 29, 2009 at 2:09 am

Is this a case of fearing or disparaging something we are not familiar with?

Yes. I would state it slightly stronger. It’s fear of something we know matters that we cannot bear to come to terms with.

Stock prices are determined by the combination of two opposite types of things. One, stock prices reflect economic realities. We understand this influence with the rational side of our brains. Two, stock prices reflect investor emotions. We understand this influence with the emotional side of our brains.

Both factors are always at work. People who are good at the emotional stuff tend to be weak at the rational stuff. People who are good at the rational stuff tend to be weak at the emotional stuff. So we break into camps. And the camps disparage each other. But I don’t see how anyone focusing on the rational stuff can hope to have a complete understanding without taking the emotional stuff into consideration and vice versa.

My view (I believe that the data strongly supports this) is that the emotional stuff is by far the dominant influence on prices in the short term and the rational stuff is by far the dominant influence in the long term. The people using technical analysis are trying to predict short-term moves by identifying patterns in how investor emotions influence prices. My personal belief is that this cannot be done. But I don’t mock it; I understand why people do it and I acknowledge that I might be wrong in my take.

I’ve chosen to give up predicting short-term prices and focus on the long term. Here, it is rational (economic) influences that are dominant. So I don’t need to bother with technical analysis. However, I believe that my openness to considering emotional factors has helped me to understand how long-term prices are set better than those who scorn technical analysis because I do take into account a factor that most who focus on the economic/rational side refuse to consider — valuations. That one difference changes my take on every investing topic.

This war between those who look at economic/rational factors and those who look at emotional factors is the cause of our economic crisis, in my view. Those who look at the economic/rational factors are dominant in this field. They have a personality type (the engineer/economist type — INTJs) that causes them to scorn consideration of human emotion. Thus, they built their model (Passive Investing/Efficient Market Theory) to ignore the emotional factor altogether. The result is that they developed a model that is terribly skewed and often insanely wrongheaded but that was developed with enough intelligence (INTJs value intelligence highly) that it has “sold” millions.

It gets things close enough to right at many times and then wildly wrong at other times. The more people who believe in this model, the more wrong it gets things (because the more popular the model is that ignores emotion, the less attention we all pay to emotion and the more out of control our emotional decisions get). Passive Investing has never been more popular than it has become in recent decades. The result is that stocks have never been more dangerous than they have been from 1996 through the current day. We are destroying our economy with our misplaced confidence in this brilliant but also fatally flawed model for understanding how stocks work.

The way out is to integrate the insights of those who believe in fundamental analysis and those who believe in technical analysis. We need to have these two types of brains working together to develop a model that looks at all the factors that actually apply. A one-factor model can never work in the real world, in my view. We already possess the intelligence and insight needed to solve our problems. But we have not been able to figure out how to get people from the opposing camps to leave the scorn aside and talk to each other and learn from each other.

Your openness to different viewpoints is inspiring, SVB. That’s a form of intelligence of its own and it happens to be the one most in need in InvestoWorld today, in my assessment.


Larry L, New York October 29, 2009 at 4:50 am

Technical analysis is like reading tea leaves, tarot cards and ouija boards.

Writers Coin October 29, 2009 at 4:58 am

I think chart analysis like what Mr. Samurai here is talking about is bull. But you’re right, technical analysis should have a place (although a limited one) in an investor’s playbook. MACD and stochastic lines can help determine certain things about a stock and what’s happening behind it, so investors should at least know how to use them.

Larry L, New York October 29, 2009 at 5:00 am

Let me add I think “Mr. Market” is a much better explanation of how stocks and the stock market works than technical analysis. Technical analysis looks at the past to determine future results regardless of the stock’s fundamentals. As someone who owns a business, I couldn’t imagine someone valuing my business’s worth based these methods. Same applies to a house valuation.

So if technical analysis sounds silly to evaluate your home or a small business, why would you do it to a stock?

John DeFlumeri Jr October 29, 2009 at 6:56 am

Technical analysis might not guarantee successful gambling, or investing as some call it. October 29, 2009 at 7:24 am

I have to throw some ideas to both you and my friend Financial Samurai.

IMO, it’s not really possible to make a blanket statement about technical analysis because no two investors use the same technique.

I abandoned “buy and hold” 9 years ago and it’s worked out well. It hasn’t been perfect. Some years, we do better than the market. Other years we do worse. The strategy I looks at overall market strength and then helps me see a) how much we should invest and b) where.

Again, it’s far from perfect and it doesn’t beat “buy and hold” every time. But this is a form of technical analysis and it doesn’t look at patterns or cups or anything else.

Having said that, Bill O’Neil, Investors Business Daily, is a big believer in this stuff and he’s been extremely successful. His approach is technical and fundamental.

Don Schenck October 29, 2009 at 7:39 am

Technical analysis is NOT about the stocks or the market, per se … it’s about human behavior. Believing that — and I do — I think it has merit. That’s my opinion.

Larry L, New York October 29, 2009 at 9:38 am

@kenyantykoon Someone tell Warren Buffet as he has NOT made his money via Technical Analysis. In fact he does not even have a computer in his office. While I don’t completely discredit technical analysis for me and I think most people it does not make sense.

Larry L, New York October 29, 2009 at 9:53 am You mention Bill O’Neil of Investors Business Daily. Which did he make more money at? His books, newspaper and trading system or as an investor? If I remember correctly there were a few mutual funds that followed his CANSLIM formula and wound up doing much worse than the S&P 500. Like most trading systems the more people that follow it the less likely to be effective. Even as of late, stocks have been seeing the Cramer effect and doing bad because of it.

Financial Samurai October 29, 2009 at 6:07 pm

Oooooh, I love the debate here! πŸ™‚

@Kenyantykoon, George Soros basis his stock decisions on technical analysis? Umm, no. Please Google George and techn analysis together, and you will see he believes technical analysis to be an utter waste of time as he questions the foundation on which this theory has been built.

Warren Buffet, Peter Lynch, Charles Brandes, Ken Griffin, and the list goes on and on…….. the greatest investors aren’t basing their buy and sell decisions on technical analysis.

@Neal – Sounds good man. Buy and hold clearly hasn’t worked for the past 10 years, otherwise, we’d all have made no money.

@SVB – How did you know I would say that?! πŸ™‚ Let me check out your thoughts on daytrading, which I believe is a long term FOOL’s game and losing proposition. The only entity that wins are the online brokerage houses.

@Larry – Hey man! Love your response. Tea leaves looking GOOD today in the markets! Too bad they looked bad yesterday!

Guys, my pet rabbit ate all its pellets today before I got home. That’s a bearish technical sign for me, which leads me to sell at the open! πŸ™‚

Best, FS

Manshu October 29, 2009 at 6:13 pm

In my mind I think of technical analysis as analysis based on price and volumes and fundamental analysis as analysis based on a company, macros and any other factors that have nothing to do with price alone.

When I look at it that way it becomes difficult to say that I buy just on fundamentals or just on technicals.

I try and buy companies that I think are doing great, but, I don’t like to buy when the market is hitting highs. I am sure that means that I look at fundamentals, but does that mean I ignore fundamentals altogether? I don’t think so. It is a mix of both.

But I do stay away from head and shoulders and all that jazz simply because I haven’t had the time or inclination to study that in any depth.

Financial Samurai October 30, 2009 at 10:25 am

Thank goodness my technical “pet rabbit” indicator told me to sell this morning! πŸ™‚

Jason October 30, 2009 at 5:05 pm

Technical Analysis coupled with Fundamental Analysis is the most powerful way to invest/trade/manage your portfolio. Both TA and FA allow you to identify trends and TA lets you define your risk, which is crucial because risk management is the most important aspect of trading/investing.

Financial Samurai October 30, 2009 at 6:54 pm

Wait, so nobody is giving me props for saying my technical bunny analysis told me to sell at the open? The open was flat folks, saving 2.5% of your stock wealth today!

Technical bunny analysis 4 life! Time stamps don’t lie πŸ™‚

Silicon Valley Blogger October 30, 2009 at 7:00 pm

@Financial Samurai.
πŸ˜‰ Umm.. okay, your pet rabbit indicator did you a favor today. Lol! On a serious note, anyone who jumped out today would have to be “right” a second time here and try to get in before the next bump up. So if anyone really had a “rabbit” whisper in their ear this time, it’ll have to tell them when to get back in….. and get it right, so that we can give them full credit.

Financial Samurai October 30, 2009 at 7:26 pm

Oh cool! My comment went through, even though on the blackberry it said there was an error. I was stuck on the bus b/c every Friday, “Critical Mass”, an organization of thousands of bikers block streets downtown. It was cool.

Thanks for recognizing my technical rabbit analysis SVB! When I came home today, he ate all his pellets again, so I wouldn’t jump back in quite yet on Monday!

Pet da bunny, so soft.



Silicon Valley Blogger October 30, 2009 at 7:41 pm

Heh, I remember “Critical Mass” very well when I used to work at a bank in the financial district and had to commute and weave through that mass of humanity. πŸ˜‰

Rob Bennett October 31, 2009 at 5:37 am

Wait, so nobody is giving me props for saying my technical bunny analysis told me to sell at the open?

Those who believe in fundamental analysis ridicule those who believe in technical analysis all the time. I rarely see those who believe in technical analysis ridiculing those who believe in fundamental analysis.

I don’t believe in either one in the way they are usually practiced. So there’s a sense in which I have no dog in the fight. But my spidey sense tells me that the ones making fun (this is not directed at Financial Samuai, it is intended as a general comment) might be suffering from some feelings of defensiveness.

My personal take is that our understanding of how stock investing works is primitive today and that that is causing us all great pain. My view is that “we’re idiots, babe, it’s a wonder we can even feed ourselves” (from the Dylan song). My take is that the medicine for idiocy is openness to learning and that ridicule can cripple learning.

Again, I don’t personally believe in technical analysis. I just don’t get why some of the others who don’t believe in it feel such a need to mock it. There are millions of smart people who practice technical analysis. Are they really all so much more foolish than we The Smart Ones? I find this hard to accept. I wonder if we might learn something from them by listening more carefully to what they have to say (without necessarily buying into it all).


Financial Samurai November 2, 2009 at 7:54 am

Rob – I’ve studied technical analysis thoroughly and fundamental analysis. I gladly use some technical indicators to help make my decisions such as noticing the volume levels in a rising share price or whatever.

But, to solely base one’s decision on technicals is foolish.

Today, my technical bunny rabbit analysis says I should “nibble” at the markets (Nov 2).

Where’s Kenyatkoon and his rebuttal on Soros? πŸ™‚

Anybody want to debate with me on why a weak USD doesn’t matter? Welcome to come over.


MossySF November 3, 2009 at 3:42 am

Beyond the overall growth of the market, it’s a zero-sum game inside. For someone to be earning extra gains, they’re taking it from somebody who is losing money. Hence, if somebody has a system to do better than the market, it is against their best interest to even hint they have such a system much less actually describe how the system works.

So my take on the entire argument (whether stock picking, technical analysis, active fund manager picking, etc) — if you believe in your methodology and you publicly proclaim your system works, you are a fool. You should instead decry your system and tell others to be on the other side of your transaction so you can take their lunch money away. (For example, the pump & dump guys don’t believe in their picks — they just want suckers to believe in it so they can sell at a profit.)

Rob Bennett November 3, 2009 at 6:06 am

I gladly use some technical indicators to help make my decisions such as noticing the volume levels in a rising share price or whatever. But, to solely base one’s decision on technicals is foolish.

I’m grateful for the back-and-forth, Samurai. I like to think that perhaps our words have helped some of those reading them to pick up on a point or two that they previously did not see as clearly.

We have a difference of opinion on both of the points raised in the words quoted above. I don’t use technical analysis at all. I personally don’t think it works. But I respect the people who employ it, even those who employ it as their sole guide, too much to dismiss their take as “foolish.” I’ve met and interacted with a number of extremely smart people who make technical-based trades on an almost daily basis. It could be that they see something that I am not today able to see and that there will come a day when I will learn something important from them. I do not ridicule them because I see them as friends who just happen to have come to different conclusions about investing than I have come to (not because either “side” lacks intelligence but primarily because we come from different sets of life experiences that limit our visions in different ways).

Please understand that I respect your views as well and that I believe that I have things to learn from my interactions with you at the various blogs at which we both participate.


Rob Bennett November 3, 2009 at 9:43 am

if somebody has a system to do better than the market, it is against their best interest to even hint they have such a system much less actually describe how the system works.

I believe that I have a “system” for beating the market re which this general rule (which in many circumstances I agree with) does not apply, Mossy. I’ll describe it here briefly in the event that you might want to consider whether there is an exception to the general rule you put forward.

My “system” is to take the price at which stocks are selling into consideration when deciding on a stock allocation. If valuations affect long-term returns (there is a mountain of academic research showing that they do), then all investors can obtain better long-term returns by taking this factor into account when setting their allocations. My added gains do not come at your expense. By taking valuations into consideration, I make the market function more effectively. It’s not a zero-sum game. We all end up winners. This is why I have no problem whatsoever sharing my “system” with anyone who cares to learn about it.

Think about the market through which we buy cars. Some of us are careful buyers, some of us are not. The careful buyers get better deals. But do they benefit only themselves? No. Those who make good deals enhance the operation of the entire market. By pressing hard for the best deal possible, they drive the rip-off artists out of business. All dealers feel pressure to set prices more competitively. We all benefit from this.

The question here is — Does the stock market function well if most investors ignore price considerations? I believe that it does not. I of course am happy that by considering price I enhance my own return. But I believe that it is also my civic responsibility to pay attention to price. I believe that we all gets better returns when those of us who care about price drive stock prices down by selling our stocks when prices have gone to insanely dangerous levels.

I view overvaluation as a form of pollution. Just as I believe that we should all try to recycle our trash, I also believe that we all should do all that we can to persuade our fellow investors to lower their allocations (and thereby pull prices down) when prices have gotten dangerously high. I believe that it was our failure to do this during the Passive Investing Era (when we were all assured thousands of times by the “experts” that it was not necessary for us to lower our allocations) that caused the economic crisis.

We all suffer from the economic crisis. We all should be doing what we can to bring it to an end, in my view. I don’t think of stock investing as something that we do just for our personal gain. The market is a community resource. When we fail to pay attention to price, we do damage to the market that is financing all of our retirements. It’s not only costly behavior. It’s also selfish behavior (although in the vast majority of cases not intentionally so), in my assessment.


Forex January 7, 2010 at 3:06 am


I appreciate the debate, guys. It’s simply proves to be advantageous for others. Technical analysis is the most difficult part of trading and requires thorough knowledge of the investment. And I appreciate the intelligence of those who are trading with technical analysis of the market trends but I make investments by identifying the current price point and correlating the things with existing trade situation.

The most important point that I found is that constant watch at the price movement can prove to be helpful.

joe February 27, 2011 at 9:41 pm

In my opinion, predicting future prices from past prices is certainly possible. I have been documenting various technical indicators such to determine if they have any edge. So far i have identified several methods utilizing RSI that has an edge beyond “random chance”. Check out my ongoing research at: RSI Trading Strategies.

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