Technical Analysis – Part 1

Financial Blogger Makes Uncanny Prediction About Market: You Won’t Believe What Happens Next!

Get ready for amazing returns with no risk.

I’m going to tell you exactly where the S&P 500 will be trading three weeks from now, at the end of the trading day on August 15th, 2018.

I’m going to show you something literally too good to be true.

Because today, I’m doing technical analysis.

This is obviously nonsense, please read on.

Why Technical Analysis?

Technical analysts believe that the price of a stock already reflects all the underlying fundamentals like earnings, dividends, and future prospects.  Therefore the path to profit is by studying charts and exploiting price patterns and trends.

What is Compelling About Technical Analysis?

First, there’s an appeal to easily making money through the superior pattern recognition skills of your brain.  My brain happens to think it’s a pretty special organ and any chance it has to out-special some other brain is pretty darn interesting.

Second, the patterns are there for the taking!  Look at the S&P 500 from the last 20 years:

See how easy it is to profit?  Just sell in late 2000, buy it all back in 2003, sell it again on October 12th, 2007, and then by back in during the spring of 2009.

Nothing could be easier, right?  Unfortunately, the decision points are only ever clear in the past, and are trickier to determine in the future.  Are we at a selling point in 2018, or continuing the inexorable march upward and onward?

Finally, there’s a tendency when things go right to affirm one’s belief in the pattern.  And yet, vexing as it is, when things go wrong the conclusion often takes the form: It was so obvious, if only I trusted my model more!

The Predictions

I promised to predict the S&P 500 on August 15th, so let’s have some fun.

I have five predictions for you.  Three of these are from “real” technical analysts, out there prognosticating in the real world.  Two of them are from me, just making things up and having fun doing pattern recognition on a random walk of data.  We’ll check back in, beware the ides of August.

Prediction 1: A Modest Pullback to 2786.38

Technical Analysis: Prediction 1

Note the actionable intelligence: “Decision area, either for new high or starting of a bigger pullback.”  So the prediction is that the market will go up or down.  But then, the actual prediction line is the black one — almost steady.

Prediction 2: Elliott Wave to All Time High:  2893.04

Technical Analysis: Prediction 2

I learned about Elliott Waves, but you can save yourself the time.  Start connecting peaks to valleys, and soon enough you’ll have the shape of a “W”.  If you look hard enough, you’ll have a few “W”s.  Convince yourself the last W is ending at the point marked (5).  BUY EVERYTHING YOU CAN.

Prediction 3: Fibonacci Crash: 2499.16Technical Analysis: Prediction 3

Or sell everything while you still can.  Technical analysis is full of jargon and stuff that is loosely based on real mathematics.  Fibonacci numbers are a real thing, and they mysteriously show up all around.  Their existence is truly a thing of beauty and magic.  But also, if you draw enough parallel lines on a graph, you can confirm almost any pattern you like.  The S&P 500 is at resistance and losing steam, it’s time for caution!

Prediction 4: Fibonacci Rally: 2930.33 on the way to 3060!

Technical Analysis Prediction 4

Or maybe Fibonacci will provide a false pullback to support at 2753 before rallying to untold new heights!  It’s clear from the red baseline boundary that we have nothing but upward potential to the long term green trend line.  Ignore the dashed line, unless the market starts chasing it.

Cat chasing laser

Prediction 5: Elliott Wave Pullback: 2763.64

Technical Analysis Prediction 5

Don’t ask me what happens when the red and green lines cross, but I’m pretty sure it ends with Anakin throwing the Emperor out of the Death Star II.  This is another variation on the Elliott Wave, but those dastardly zig zags are predicting a down zig instead of an up zag.

The real lesson I learned about technical analysis is that you should just predict everything happening, and you’re bound to be right at some point.

Does Technical Analysis Work?

No.

While there’s ample evidence and research against technical analysis, let’s look through a lens of basic logic.  We’ll assume you’ve discovered some pattern in the market hitherto overlooked (nice one!).  You can predict with some significant level of confidence where the market will be a few weeks from now.  What would happen?

  1. You would keep your method to yourself and become fantastically wealthy.
  2. You would sell your method to others, and they would become fantastically wealthy, until
  3. The money making pattern would become known by enough other people that, seeking to profit from your prognostication they would all buy (or sell) based on the pattern forming, and remove the inefficiency from the market.

Basically, if something is selling for $100 today, and a few people become aware that it will likely sell for $200 tomorrow it’s not going to take too long for it to sell for $200 today.

Add in the friction from transaction costs, and your strategy – even if it was real to begin with (it wasn’t, sorry) – has become a loser.

You should be skeptical of someone giving away profitable advice for free [Ed: this blog notwithstanding] and even more skeptical of those selling advice to you: they are guaranteed a profit and you are guaranteed a fee.

Why Technical Analysis Tricks People

Imagine a thousand and twenty four people are guessing the results of a coin flip.  Get one guess wrong, and you’re OUT.

About half predict heads, and half predict tails.

flip

Now 512 people remain.

flip

256 people have guessed the first two flips right.

flip flip flip

Now we’re down to the best of the best, the 32 survivors have guessed five coin flips correctly.  This isn’t an easy thing to do!

flip flip flip flip flip

One person gets all ten flips correct.

We tend to forget about the other 1023 people, and fixate on the outstanding success of this one superior predictor.  For $19.99, you can buy their prediction on the next coin flip.

 

Check back in a few weeks to see whose technical analysis was best!  I’ll put their future predictions on sale for followers of this blog.  Speaking of which, if you want to make sure you don’t miss Part II, why not…



 

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