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Technical Analysis
Why is it important?
Benjamin Graham
said the following:
"The
one principal that applies to nearly all these so-called
"technical approaches" is that one should buy because a
stock or the market has gone up and one should sell because
it has declined. This is the exact opposite of sound business
sense everywhere else, and it is most unlikely that it can lead
to lasting success in Wall Street. In our own stock-market
experience and observation, extending over 50 years, we have not
known a single person who has consistently or lastingly made
money by thus "following the market." We do not hesitate to
declare that this approach is as fallacious as it is popular".
What I find
most disturbing is how inconclusive
technical analysis is, and how much variation there
is in analysts' opinions.
Visit any technical analysis message
board, and you will find heated conversations usually
revolving around "support and resistance levels".
And, I am not referring to investors who are
new to technical analysis, I am referring to extremely
experienced and well known technical analysts.
For
the average investor, it is often a difficult
dilemma to try and make sense out of the
conflicting opinions regarding where the market is going. Is
the market cheap or is it expensive? Is the market going
up or down? Does the market have support at these
levels or is it ripe for a fall?
If you are confused about the direction of the market, you
are not alone.
It seems the pros are often just as confused as you
are.
Now, I do
not want you to form an opinion that I do not believe in
technical analysis, in fact;
if anything, I am a firm believer that one must respect
the fact that millions of investors and professional
money managers follow technical analysis.
So, for
anyone to ignore technical analysis, even though it has
serious limitations, is a huge mistake. |
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Example: In a down market, a technical analyst looking at the SPX chart below
will point out that the market has major support level at 975 as tested on August 2003.
If the SPX support had not held at the 975 level, this very
same Analyst would likely have pointed out the two year support level
of 775 reached on October 2002 as the next most logical
support level.
Most inexperienced investors will view the concept of
changed support targets as a case of an Analyst not knowing
his craft. The reality is that no one really
knows for certain, and choosing the next level
of lower lows reached in previous support levels is
an acceptable practice in the field of technical
analysis.
While technical analysis is far
from perfect, one must always respect
the fact that far too many investors and money managers follow
it.
So, when a predetermined support level does
not hold, and thousands of investors and money managers see
the next support level, it often becomes a self fulfilling
prophecy.
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There are many
additional concepts and indicators in technical analysis that are
well worth investigating. However, if you, like most
investors are looking at technical analysis to tell you the absolute
support and resistance
levels, be prepared to be seriously disappointed.
For many years, the search for Support has
occupied the minds of thousands of investors and researchers. Support as most investors view it is a fallacy. Support is
only a temporary
stop that can be mathematically calculated. To think that there
is such a thing as long term support is as naive as the belief that a company
will always deliver on its projected earnings.
Technical analysis, while very
useful as a short term "snap shot" type analysis, is a very limited science. By the time you get a
buy or sell signal, the move is usually about 20-30% underway. I, myself,
found the process of picking stocks through traditional Technical Analysis
very limiting, and most importantly, difficult to rely on. Being a
mathematically oriented and structured type investor, I
needed more stability and more proof in order
to invest my hard earned money. Quite frankly, technical
analysis has never showed me such proof, and today I am
more convinced than ever. Technical Analysis is
simply a self fulfilling mechanism. Nothing else,
nothing more.
In my 16 years of research I have combined 3
concepts from traditional Technical Analysis, which I have found to be the
most sensible: the Moving Average, the Trading Bands, and the RSI. From
these 3 indicators I have created GetFolio.com Investment Strategy, combining
technical, fundamental, Sector timing, and most importantly risk/reward
analysis, all into what I and many others consider to be the most logical
system ever put together.
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