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CompareShares Reader
Cloud gazing or tea leaves?
August 27, 2007
Mark "Bof" Bofinger
CompareShares Reader is a new section where investors can submit articles for publication. This month we hear from Mark "Bof" Bofinger
I'm more of a believer in fundamental analysis than technical analysis.
Now let me lose the remaining half of you readers by flip-flopping and presenting some of my reasons for learning more about technical analysis and some of my feelings and conclusions.
I would be unwise to ignore something that so many people are learning about, using, or otherwise believe in. Even if you don't pick spinners in cricket, you still want your batsmen to know how to play them.
And with advertisements and seminars emphasising that I can have financial security, early retirement and my own unicorn, I'm tempted. But my cynical mind always looks for proof more substantial than pictures of the presenters in front of expensive sports cars, and I wonder if it's the magic formula or the seminar fees which paid for them.
As a result I've been attending a variety of seminars on technical analysis, of which there is a plentiful supply.
I've heard arguments on the advantages of particular trading rooms, reputations of analysts, further education, financial instruments, replacements for instruments and combinations of instruments. I've learnt about candlesticks and when to look at the relationship of the tops or bottoms of successive ones, charts based on time or the number of contracts traded, more types of moving averages than I care to think about, heads and shoulders, reversals and continuations, increasing highs and decreasing lows, graphs comparing volumes and signals, ...
...and I think I've noticed some patterns. Or perhaps I've convinced myself that there's a pattern.
It's very tempting to see patterns in chaos, particularly any pattern that lets you wake up richer than you went to bed.
But I'm not alone in dreaming that I might notice the pattern and discover the magic formula before any other technical analyst, whether working alone or supported by massive research teams and budgets.
Shakespeare (and every other author who wrote enough words) could predict the future too. Look for a short enough sequence of letters equally spaced (say "u..r..a..n..i..u..m") throughout their works, and you have a good chance of finding it. (No, this article wasn't written by an infinite number of monkeys banging away on their typewriters.)
The increasing availability of data sets can support searching for otherwise invisible patterns, but it also provides the breeding ground for enough theories so that if you tested them all, through pure chance there should be strong statistical evidence supporting some of them. Classic examples include correlations between election results, hemlines and winning sports teams.
But some patterns do seem to exist in the chaos. It shouldn't be a surprise that options which are in the money correlate pretty highly with the underlying security, that a share drops in price when it goes ex-dividend, or that weird things happen at the end of the financial year or around the release of financial reports.
And human beings sometimes enjoy a common frenzy, both on the market and at the after-Christmas sales.
All in all, I prefer patterns that have some possibility of being explained, but that doesn't mean that there mightn't be a pattern out there that is beyond all of us. After all, if bacteria cannot comprehend the behaviour of a human body, then am I deluding myself in thinking that I can understand the market?
There's also something appealing about looking at a graph rather than reading an annual report, needing to know little or nothing about the security itself and instead focussing on alluring shapes on the screen.
Much investment advice also discourages letting your emotions dictate your actions, and there's a level of objectivity inherent in technical analysis which can help you follow such advice.
So, if you will, search with optimism but review with suspicion.
And although I'm loathe to give lessons in arithmetic or to check facts, I thought I'd provide just two pointers to anyone intending to present such seminars.
- Black and Scholes didn't win a Nobel Prize in Mathematics. It's difficult to win a prize that doesn't exist; a popular myth being that Nobel didn't like his wife spending time with a mathematician. However, the 1997 Sveriges Riksbank Prize in Economics in Memory of Alfred Nobel did go to Merton and Scholes.
- If you're going to claim that multiples of squares are lines of support or resistance for an index, remember that 9 squared is not 71. Also, 168 is not a square, except of 12.961... which most cultures do not view as mystically significant.
Feel free to join me on the lawn and gaze up at the clouds; once your cheque has cleared, I will initiate you in the mysteries of how to interpret the free, if somewhat subjective, buy and sell signals that pass above us.
Sorry, no divining through tea leaves. I'm a coffee man.
Dr. Mark Bofinger works for Savive as a consultant and trainer on safety-critical systems.
More articles from this week's CompareShares newsletter:
Markets: Trouble in China has investors guessing
Self-managed super: Old strategies are now even better
Sustainable investing: Climate change and consumers: hot air or real deal?
Ratios: Chief ratios for stock hunters - part 2
Resident Trader: Trading CFDs in a gapping market
Smart Investing: Experience tunes in to the market blues
Analyst report: Retail in a tailspin?
US markets: Long valuation waves and market fear
Sub-prime: Sub-prime what?
Ask the expert: Uncovering the average forex trader
Stock of the week: Mincor shares suffer from nickel freefall
CFDs: Pyramiding provides windfall to CFD traders
CompareShares Reader: Cloud gazing or tea leaves?
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