A recent Barron’s article quoting a couple of my technical analyst industry peers made a number of comparisons between technical analysis and astrology.
Quotes like this were peppered through the article: “Astrologers look at stars and divine different messages, but leading technical analysts are seeing similar messages from the breakout in the charts.”
Now, to be clear, the article mostly makes the point that technical analysis is not astrology and that technicians believe there is information to be found in price movements. And I use the word “believe” in a similar way that you might “believe” that the sun will come up again tomorrow.
It’s actually based on fact. From Robert Levy’s 1967 article in the Journal of Finance on the value of relative strength in stock picking, to numerous research articles describing the consistent outperformance of the momentum factor, there is now plenty of evidence supporting the value of looking at price.
But I digress.
Articles like the one in Barron’s used to really get under my skin. I’ve heard technical analysis be compared to astrology, voodoo, witchcraft, tea leaf reading, fortune telling, snake oil sales, and many other questionable disciplines. I’ve been introduced as a “practitioner of the dark arts”, a “so-called technical analyst”, a “market soothsayer”, and even a “market witch doctor”.
None of those are made-up by the way. They all happened. And bear in mind that I’m about as straight-laced as they come in terms of technical analysis. I’ve always used things that are easily understood, easily explainable, and consistently profitable. Granted, there are items under the “technical analysis” umbrella that are fairly esoteric, but that’s not my game.
I noticed that when I read this article that I just sort of laughed it off. Astrology references used to really bug me. Now they make me giggle. What changed?
When I started in the industry in 2000, things like the Robert Levy article were not widely known, quantitative investing wasn’t really a thing, and no one talked about the momentum factor. Even with the rise of hedge funds, most of which employed price-based trend-following systems in their black box models, technical analysis was certainly not in the mainstream.
In 2000, if you used technical analysis it’s because either a) you had a background in trading, where traders were trading the tape, a.k.a. “trading on feel”, and technical analysis provided a valuable framework to add discipline to a very subjective process; or b) you “believed” that technical analysis worked.
There was scant academic evidence to support the idea that technical analysis actually added value, in fact, most academic studies embraced the Efficient Market Hypothesis and denigrated technical approaches.
In 2019, if you don’t use technical analysis, you’re actually ignoring a growing pile of research that supports the value of trend-following and price analysis. You’re clinging to old ways of thinking that are becoming increasingly obviously incomplete. To put it simply, you’re missing the trend.
Professor Andrew Lo at MIT once explained that technical analysis simply has a language problem. He explained an example price series using the language of technical analysis and then explained the same price behavior from an academic/mathematical perspective.
One sounded overly simplistic and straightforward, the other sounded more complex and analytical and inaccessible to me.
I would argue that in an industry that has tended to gravitate to the complex when the simple will often suffice, that investors could use a little more “simple” in their process.
I used to think technical analysis needed defending. I don’t think so anymore. Price analysis can be called lots of things- technical analysis, momentum, trend-following- but in the end, it’s about recognizing the fact that there is information embedded in price movements. And that’s where I choose to base my investment process.
RR#6,
Dave
Reformed Market Witch Doctor
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