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"Technical Analysis"

Puppycow

Penultimate Amazing
Puppycow
Joined
Jan 9, 2003
Messages
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Location
Yokohama, Japan
I'll admit upfront that I don't know a lot about this subject, but something about it seems dubious to me.

First, here is the definition (and example sentence) I got when I Googled the term:

noun
Finance
  1. financial analysis that uses patterns in market data to identify trends and make predictions.
    "he reads up on company fundamentals and news as a way to double-check his technical analysis"
Click to expand...
Is it possible that "patterns in market data" are a reliable way to make predictions about whether a particular asset, investment, or financial instrument will rise or fall in the future? Reading about "company fundamentals and news", sure. It's pretty obvious why that would potentially yield useful information. But I'm very skeptical that "patterns in market data" per se can be predictive of what will happen in the future.

Here is the Wikipedia article on the topic, and the first paragraph:

Technical analysis - Wikipedia

en.wikipedia.org en.wikipedia.org
In finance, technical analysis is an analysis methodology for analysing and forecasting the direction of prices through the study of past market data, primarily price and volume.[1] As a type of active management, it stands in contradiction to much of modern portfolio theory. The efficacy of technical analysis is disputed by the efficient-market hypothesis, which states that stock market prices are essentially unpredictable,[2] and research on whether technical analysis offers any benefit has produced mixed results.[3][4][5] It is distinguished from fundamental analysis, which considers a company's financial statements, health, and the overall state of the market and economy.
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It makes sense to me that stock market prices are essentially unpredictable in the short term unless you are privy to insider knowledge, or any sort of relevant information that isn't widely known by the general market investors. Everything else is supposedly "priced in" already.
 
Puppycow said:
I'll admit upfront that I don't know a lot about this subject, but something about it seems dubious to me.

First, here is the definition (and example sentence) I got when I Googled the term:


Is it possible that "patterns in market data" are a reliable way to make predictions about whether a particular asset, investment, or financial instrument will rise or fall in the future? Reading about "company fundamentals and news", sure. It's pretty obvious why that would potentially yield useful information. But I'm very skeptical that "patterns in market data" per se can be predictive of what will happen in the future.

Here is the Wikipedia article on the topic, and the first paragraph:

Technical analysis - Wikipedia

en.wikipedia.org en.wikipedia.org

It makes sense to me that stock market prices are essentially unpredictable in the short term unless you are privy to insider knowledge, or any sort of relevant information that isn't widely known by the general market investors. Everything else is supposedly "priced in" already.
Click to expand...
What happens if it does work?

Those using it would outperform the market and they would end up perturbing the market.

Also, one should also be able to get a second derivative and see the shapes of the graphs that would lead to the shapes of the graphs that are the indicators of the movements in the market.

In short, I think it could only ever work briefly, and I'm reality I wouldn't even believe that.
 
jimbob said:
What happens if it does work?

Those using it would outperform the market and they would end up perturbing the market.

Also, one should also be able to get a second derivative and see the shapes of the graphs that would lead to the shapes of the graphs that are the indicators of the movements in the market.

In short, I think it could only ever work briefly, and I'm reality I wouldn't even believe that.
Click to expand...
I could imagine finding certain patterns that seem to repeat based on, say, the time of day or day of the week, given that markets open and close on a regular weekly schedule. For example, maybe prices tend to rise on Monday mornings, and fall on Friday afternoons. But once those sort of predicable patterns became known, people would use that knowledge to front-run what they know is about to happen. And then you would also be able to front-run the front-runners. Any pattern that truly is predictable would eventually be "priced in".
 
Puppycow said:
I could imagine finding certain patterns that seem to repeat based on, say, the time of day or day of the week, given that markets open and close on a regular weekly schedule. For example, maybe prices tend to rise on Monday mornings, and fall on Friday afternoons. But once those sort of predicable patterns became known, people would use that knowledge to front-run what they know is about to happen. And then you would also be able to front-run the front-runners. Any pattern that truly is predictable would eventually be "priced in".
Click to expand...
Absolutely, that's why I think it's wishful thinking at best.
 
In addition.

Markets are not rational. They are driven by sentiment. But I would be willing to believe that under certain circumstances they might behave as chaotic systems.

Which isn't amenable to such analysis of graphs.
 
TA depends on the idea, nay Faith, that there is something like Laws of Nature governing Markets.
Which is false - any patterns are based on the fact that everyone with the ability to impact Markets has had pretty much the same education and gets the same news.
 
i would assume market performance is too dependent on external factors where it’s just a graph missing a ton of the most important data
 
dirtywick said:
i would assume market performance is too dependent on external factors where it’s just a graph missing a ton of the most important data
Click to expand...
Not only external factors, but also as The Great Zaganza implies, internal, irrational, superstitious, "sentiment".

The Great Zaganza said:
TA depends on the idea, nay Faith, that there is something like Laws of Nature governing Markets.
Which is false - any patterns are based on the fact that everyone with the ability to impact Markets has had pretty much the same education and gets the same news.
Click to expand...
 
If AI could reliably predict the market the market will just be AIs with no idea what they are predicting and doing, I don’t think such predictions are possible because although the market can be considered separate to the underlying reality, understanding the patterns requires predicting the forces that create them. The market doesn't generate itself—it reflects the actions of countless companies, their employees, and their customers. To make accurate predictions, you’d need to foresee the behaviour of nearly the entire population. It's essentially Asimov's concept of psychohistory applied to economics.
 
Incredible numbers of neurons and incredible numbers of electrons have been expended in efforts to develop a predictive model for markets based on past performance. I have yet to see any succeed.
 
JayUtah said:
Incredible numbers of neurons and incredible numbers of electrons have been expended in efforts to develop a predictive model for markets based on past performance. I have yet to see any succeed.
Click to expand...
I would argue that even if one did succeed. Its mere existence would perturb the same market that it would become obsolete very quickly
 
Yesterday I did a brief search on news about Tesla stock. It came back with several articles, but I noticed two with opposing arguments. One was saying that Tesla is in worse shape than people realize. Another predicted that shares of Tesla were poised to rise by as much as 34%. The latter prediction was based on "technical analysis". It's sort of what inspired me to start this thread.
 
Puppycow said:
Yesterday I did a brief search on news about Tesla stock. It came back with several articles, but I noticed two with opposing arguments. One was saying that Tesla is in worse shape than people realize. Another predicted that shares of Tesla were poised to rise by as much as 34%. The latter prediction was based on "technical analysis". It's sort of what inspired me to start this thread.
Click to expand...
And if anyone could make that sort of market prediction without insider information, they'd have a Nobel Prize in economics and enough money to own their own continent. Market analysts are always confident in their ability to tell you today why the market did what it did yesterday. But that wisdom promptly evaluates when they propose to tell you what markets will do tomorrow.
 
JayUtah said:
And if anyone could make that sort of market prediction without insider information, they'd have a Nobel Prize in economics and enough money to own their own continent. Market analysts are always confident in their ability to tell you today why the market did what it did yesterday. But that wisdom promptly evaluates when they propose to tell you what markets will do tomorrow.
Click to expand...

xkcd.com

Sports

xkcd.com xkcd.com

Alt text
sports.png


Also, all financial analysis. And, more directly, D&D.



The alt text is relevant
 
Last edited:
Puppycow said:
I'll admit upfront that I don't know a lot about this subject, but something about it seems dubious to me.

First, here is the definition (and example sentence) I got when I Googled the term:


Is it possible that "patterns in market data" are a reliable way to make predictions about whether a particular asset, investment, or financial instrument will rise or fall in the future? Reading about "company fundamentals and news", sure. It's pretty obvious why that would potentially yield useful information. But I'm very skeptical that "patterns in market data" per se can be predictive of what will happen in the future.

Here is the Wikipedia article on the topic, and the first paragraph:

Technical analysis - Wikipedia

en.wikipedia.org en.wikipedia.org

It makes sense to me that stock market prices are essentially unpredictable in the short term unless you are privy to insider knowledge, or any sort of relevant information that isn't widely known by the general market investors. Everything else is supposedly "priced in" already.
Click to expand...

Personally I think it's no different than reading tea leaves, or astrology.

TA is predicated on past price trends directly affecting future price trends. That's entirely circular, entirely insubstantial. The only reasonable way to establish a causal link between the one and the other is if enough people bought into the myth. A self-filfilling prophesy, as it were.

----------

@jimbob makes a fair point generally. That's the rationale behind the random walk hypothesis, that suggests that, in efficient markets, all relevant information will already have been factored in. Even such sensible, real factors as actual business developments, and meaningful fundamental analysis.

But this assumes efficient markets. A theoretical construct, like perfect competition. In practice, market inefficiencies might present opportunities, that value investors, for instance, try to tap into.

In any case, it's kind of moot, when it comes to reading tea leaves!

----------

That said, TA is widely employed, there's no contesting that. I've often wondered about that.

Regardless of whether the logic of the causal link proposed makes sense --- it doesn't! --- is there any such link at all? To my knowledge there isn't. But then I'm not aware if any such link has been explicitly researched. Stands to reason it might have been, it's such an obvious thing to check out.

Should such research be brought up here, then that should make for interesting reading. I know we have some members here that swear by TA, maybe they'll post something in support.
 
jimbob said:
xkcd.com

Sports

xkcd.com xkcd.com
The alt text is relevant
Click to expand...
Back when I did a lot of comedy improv, we had a running skit with me and other guy playing two sports commentators, Herb Chicken and Buck Tugly. Obscure sports statistics were a staple of that act: "You know, Buck, that's only the 13th time in post-season play that a switch-hitter has bunted for a base hit in the bottom of an even-numbered inning."

Chanakya said:
Personally I think it's no different than reading tea leaves, or astrology.
Click to expand...
Markets are somewhat predictable. But they are such vastly complex and chaotic animals, and so beholden to future chaotic unknowns (i.e., Trump), that to say a given stock is "poised" to increase by an exact percentage is pretty much divination.
 
JayUtah said:
...Markets are somewhat predictable. But they are such vastly complex and chaotic animals, and so beholden to future chaotic unknowns (i.e., Trump), that to say a given stock is "poised" to increase by an exact percentage is pretty much divination.
Click to expand...

Sure, that too. (On one hand, the efficient markets thing. On the other hand, and as you rightly say, the so-very-many-complex-factors thing.)

But despite that, markets are, as you say, somewhat predictable, I agree. But predictable via such meaningful routes as looking at earnings, financials, industry info, regulations, politics even --- real factors all, that make for the complexity you speak of.

But TA? That assumes, essentially, that past price trends will be projected onto future price trends. I don't think there's any reasonable way to suggest they might help understand market trends even somewhat. (Well, unless enough people did it, and brought in self-filfilling calls/prophecies.)

-----

But like I said, these fancy TA figures, I've not actually looked at actual price trends being studied vis-a-vis those. I'm sure such research is out there, it's such an obvious thing to check. Let's see if the TA supporters --- and we do have some here --- present any such research here, should make for interesting reading if they do.
 
I have tutored thousands of college students in finance over the last decade, and only once have I had a student come in with a technical analysis question, so it's certainly not commonly taught as an academic discipline. Pareidolia is my working assumption.
 
Brainster said:
I have tutored thousands of college students in finance over the last decade, and only once have I had a student come in with a technical analysis question, so it's certainly not commonly taught as an academic discipline. Pareidolia is my working assumption.
Click to expand...

Depends on what subjects in Finance you teach, I guess. Standard SAPM syllabuses will include a section on TA, in my experience.

And in any case, research reports that brokerages and research houses send out to their clients do usually incorporate TA.

(Like I said before, I personally don't think it's any different than studying constellations, or tea leaves, or entrails. Pareidolia, as you rightly say, and I agree. ...Just, it's very much a thing, I'm afraid, even though IMV it shouldn't be.)
 
Puppycow said:
Yesterday I did a brief search on news about Tesla stock. It came back with several articles, but I noticed two with opposing arguments. One was saying that Tesla is in worse shape than people realize. Another predicted that shares of Tesla were poised to rise by as much as 34%. The latter prediction was based on "technical analysis". It's sort of what inspired me to start this thread.
Click to expand...
That's because in essence the Tesla stock has become decoupled from the actual business of Tesla.
 
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