For most fundamental investors, "technical analysis" a.k.a. "chartists" are sort of akin to horoscopes, or reading tea leaves or chicken entrails ... and there's tons of pseudo-science surrounding it. If one starts to use that, it usually means one is running out of ideas, and is giving up on the efficient markets hypotheses and/or random walk theory https://en.wikipedia.org/wiki/Technical_analysis .
When I was a young kid in the '80s working at a New York brokerage firm, there was a room that was an old windowless bank vault in which four "chartists" sat (this was pre-advanced-computer printers) hand-drawing stock price charts, and then trying to draw head-and-shoulders and moving average lines on top of them , essentially, drawing straight lines on squiggly lines until a plausible trend emerges and then write a report on it. I asked our head of equities why we employed them if we had 50 fundamental analysts sitting around them, and he replied "every newspaper has a horoscope column, and every Wall Street house has a room with chartists ... it's entertainment".
That said, technical analysis *does* have provide some useful insights into how traders trade (Klement points out some of the anchor points), and fundamental analysis is about how stocks trade over the long haul. "In the short term the market's a voting machine, in the long term it's a weighing machine." That's why the CFA curriculum, if I'm not mistaken, still has required reading on technical analysis for people to be familiar with it https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/technical-analysis .
I also remember tha back in the '80s, using logarithmic scales instead of linear scales was briefly en vogue; I suppose that went out of favor when tech stocks began running in the mid-'90s ;-)
I was corresponding with someone yesterday on long-term gasoline prices, and used this chart, which includes a nominal and a real trendline https://afdc.energy.gov/data/10641 . It suddenly struck me how I've never ever seen an inflation-adjusted stock price chart. I suppose that's because inflation is "baked in" already, bu I started to wonder how a chartist might analyze the two lines very differently. Just a thought.
I agree with you that chart analysis is typically not very useful. But I resort to it in two circumstances based on the simple fact that every trader here in the trading room I sit in while writing this uses chart analysis:
1. It can give you an idea bout short-term moves that are not driven by fundamentals. And as much as we are long-term investors and should ignore these short-term moves, you need to be aware of triggers to crystalise fundamental value. And when everybody looks at resistance or support levels, guess what, chart analysis can become a self-fulfilling prophecy.
2. In a market panic, fundamentals don't matter. Nobody cares about the long-term anymore as everybody is trying to safe their soul. In these moments driven entirely by investor psychology, chart analysis is literally the only guide you have to what market may be doing.
It definitely appears to have a calmative effect when a stock "breaks its 52-week moving average" or "hits long-term support levels" https://en.wikipedia.org/wiki/Technical_analysis#Principles . The old hands on the floor would often say things like "this stock looks tired on the upside, or "this stock looks oversold" on the downside, I think reflecting years and years of staring at screens and seeing that signals like this can reflect whether a stock has run out of "natural buyers/sellers".
One great unspoken is that if computer-based trading strategies are programmed to buy or sell when they hit Bollinger Bands https://en.wikipedia.org/wiki/Bollinger_Bands and similar trigger points, it could well mean that technical analysis actually works more reliably today than it did decades ago.
Whether it's really just case of the tail wagging the dog/self-fulfilling prophesy, who knows?! One would think that that sort of predictable occurance would be arbitraged out by now; as Yogi Berra once said about a nightspot, "Nobody goes there anymore. It’s too crowded."
JK gives a balanced view rather than the usual “Technical Analysis made me 1000% return”, or “TA is Nonsense voodoo”.
I use Fundamental Analysis to choose candidates to buy or sell, but TA is useful for the “When” to buy or sell.
Over FA & TA I place greater priority to diversification (age appropriate - I would not hold Fixed Income when aged 40 yo - and the ‘macro’ of the sector (Not macro as in trying to predict Interest Rates etc). This caused me to buy Gold in 2017 Miners in 2019 and Oil & Gas in 2020, having avoided them entirely for many years before then.
I read Gunnar’s post. I prefer “log” to “linear” scales as the eye sees the % rises more accurately.
For most fundamental investors, "technical analysis" a.k.a. "chartists" are sort of akin to horoscopes, or reading tea leaves or chicken entrails ... and there's tons of pseudo-science surrounding it. If one starts to use that, it usually means one is running out of ideas, and is giving up on the efficient markets hypotheses and/or random walk theory https://en.wikipedia.org/wiki/Technical_analysis .
When I was a young kid in the '80s working at a New York brokerage firm, there was a room that was an old windowless bank vault in which four "chartists" sat (this was pre-advanced-computer printers) hand-drawing stock price charts, and then trying to draw head-and-shoulders and moving average lines on top of them , essentially, drawing straight lines on squiggly lines until a plausible trend emerges and then write a report on it. I asked our head of equities why we employed them if we had 50 fundamental analysts sitting around them, and he replied "every newspaper has a horoscope column, and every Wall Street house has a room with chartists ... it's entertainment".
That said, technical analysis *does* have provide some useful insights into how traders trade (Klement points out some of the anchor points), and fundamental analysis is about how stocks trade over the long haul. "In the short term the market's a voting machine, in the long term it's a weighing machine." That's why the CFA curriculum, if I'm not mistaken, still has required reading on technical analysis for people to be familiar with it https://www.cfainstitute.org/en/membership/professional-development/refresher-readings/technical-analysis .
I also remember tha back in the '80s, using logarithmic scales instead of linear scales was briefly en vogue; I suppose that went out of favor when tech stocks began running in the mid-'90s ;-)
I was corresponding with someone yesterday on long-term gasoline prices, and used this chart, which includes a nominal and a real trendline https://afdc.energy.gov/data/10641 . It suddenly struck me how I've never ever seen an inflation-adjusted stock price chart. I suppose that's because inflation is "baked in" already, bu I started to wonder how a chartist might analyze the two lines very differently. Just a thought.
P.S. Here's the note I wrote: "There's an amazing capriciousness of human memory on gasoline prices. Someone online pointed out that there's an old Stuckey's on I-135 in Kansas just outside of a town called Bridgeport that shut down in 2004. The old fuel price sign is still up and shows $2.959 per US gallon https://maps.app.goo.gl/4aTx88kKXnhHhNFg7?g_st=ic ; fuel in the same area right now is $3.099, so 20 years apart and a 10 cent nominal difference. It's even more amazing to apply 20 years of CPI inflation to the former, which shows it had 70%(!) more purchasing power https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=2.959&year1=200401&year2=202407 ; going the other way on the latter, today's gas is $1.83 in 2004 dollars ... 41% cheaper https://data.bls.gov/cgi-bin/cpicalc.pl?cost1=3.1&year1=202407&year2=200401 . In real terms, it's now cheaper than it was in the early '50s https://afdc.energy.gov/data/10641 . So what happened to all the "I did that!" stickers on American gas pumps? https://en.wikipedia.org/wiki/I_Did_That! ."
I agree with you that chart analysis is typically not very useful. But I resort to it in two circumstances based on the simple fact that every trader here in the trading room I sit in while writing this uses chart analysis:
1. It can give you an idea bout short-term moves that are not driven by fundamentals. And as much as we are long-term investors and should ignore these short-term moves, you need to be aware of triggers to crystalise fundamental value. And when everybody looks at resistance or support levels, guess what, chart analysis can become a self-fulfilling prophecy.
2. In a market panic, fundamentals don't matter. Nobody cares about the long-term anymore as everybody is trying to safe their soul. In these moments driven entirely by investor psychology, chart analysis is literally the only guide you have to what market may be doing.
It definitely appears to have a calmative effect when a stock "breaks its 52-week moving average" or "hits long-term support levels" https://en.wikipedia.org/wiki/Technical_analysis#Principles . The old hands on the floor would often say things like "this stock looks tired on the upside, or "this stock looks oversold" on the downside, I think reflecting years and years of staring at screens and seeing that signals like this can reflect whether a stock has run out of "natural buyers/sellers".
One great unspoken is that if computer-based trading strategies are programmed to buy or sell when they hit Bollinger Bands https://en.wikipedia.org/wiki/Bollinger_Bands and similar trigger points, it could well mean that technical analysis actually works more reliably today than it did decades ago.
Whether it's really just case of the tail wagging the dog/self-fulfilling prophesy, who knows?! One would think that that sort of predictable occurance would be arbitraged out by now; as Yogi Berra once said about a nightspot, "Nobody goes there anymore. It’s too crowded."
JK gives a balanced view rather than the usual “Technical Analysis made me 1000% return”, or “TA is Nonsense voodoo”.
I use Fundamental Analysis to choose candidates to buy or sell, but TA is useful for the “When” to buy or sell.
Over FA & TA I place greater priority to diversification (age appropriate - I would not hold Fixed Income when aged 40 yo - and the ‘macro’ of the sector (Not macro as in trying to predict Interest Rates etc). This caused me to buy Gold in 2017 Miners in 2019 and Oil & Gas in 2020, having avoided them entirely for many years before then.
I read Gunnar’s post. I prefer “log” to “linear” scales as the eye sees the % rises more accurately.