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Strategies & Market Trends : The Rational Analyst -- Ignore unavailable to you. Want to Upgrade?

To: HeyRainier who wrote (1364)	8/26/1998 1:09:00 AM
From: ftth	Respond to of 1720

(OFF TOPIC) This was such a tempting topic to ramble about. Although I'm not attempting to defend TA as a stand-alone tool for stock market success, the silliness of some of the statements in that article (and how the same arguments could apply to all other types of analysis) should at least be highlighted. Personally, I'm a firm believer in the "multiple confirming methods" approach. First let's be clear on one thing: the Random Walk Theory (if you assume it's true for the moment) invalidates Technical Analysis, Fundamental Analysis, Psycho-Analysis, Strategic Analysis, Solar storms, or any other method which professes at least some level of ability to forecast future prices. For some reason, it seems to always be used as a thorn in the side of Technical Analysis. If the Random Walk theory, which is rationalized by the Efficient Market Theory, is true over any and all time frames, the classical forms of technical analysis (chart reading) indeed don't work. Trouble is, there are tens of thousands of head-and-shoulder patterns, double tops and bottoms, etc. that have occurred throughout time. The fact that they aren't 100% accurate doesn't make them useless or invalidate technical analysis. They don't even need to be accurate significantly more than they're wrong to be useful as long as a sound risk management system is in place. No one can deny that some of them work. It can be shown with historical charts. Stock prices are a mixture of trends and indecisiveness. The trends can persist, sometimes for a long time, and sometimes without any meaningful pause to consolidate. It must have been the "Random Walk Escort Service" that took AMZN from the low 40's to the low hundreds in a month (where it still sits) for no apparent reason that could be described by the Efficient Market Hypothesis. Tell me that supply and demand were in equilibrium during this move, or tell me that new information was persistently becoming available throughout this move that was causing continuous, instantaneous, upward readjustment in prices by the market. And this was hardly an isolated example of such price behavior. If people choose to ignore strong and persistent trends, or dismiss them as "statistical abnormalities" the way the misguided random walkers do..well...fine! If they're so confident it seems they should be shorting into the uptrend, or hell with the high level of confidence they have based on their Random Walk certainty, they should be heavy put buyers into the uptrend. Those of us that use TA understand that no trend lasts forever, and that the forecastability of the trend is arbitraged away as it moves forward. The trending movement will eventually end because of supply pressures, but that doesn't mean it will revert back to its starting point. Speaking of TA, there's even a "Random Walk Index" in most "charting" packages (now there's some irony) that points out when a stock's price characteristics go outside the bounds described by the random walk theory. Oh wait, I forgot. That insightful article made it clear that just can't happen: ".(Random Walk) clearly proved that no chart pattern had any predictive value above and beyond what was possible through pure chance." So much more to ramble about on this topic, but gotta go. dh