Why Technical Analysis Never Works
Welcome to the year from hell.
We have now collapsed 16% from the January high. Buyers are few and far between, with one day, 5% crashes becoming common.
By comparison, the Mad Hedge Fund Trader is up a nosebleed 88.48% during the same period.
The Harder I work, the luckier I get.
Go figure.
It makes you want to throw up your hands in despair and throw your empty beer can at the TV set.
Let me point out a few harsh lessons learned from this most recent meltdown and the rip-your-face-off rally that followed.
Remember all those market gurus claiming stocks would rise every day for the rest of the 2022?
They were wrong.
This is why almost every Trade Alert I shot out this year have been from the “RISK OFF” side.
“Quantitative Tightening”, or “QT” is definitely not a stock market-friendly environment.
We went into this with big tech leaders, including Apple (AAPL), Amazon (AMZN), Google (GOOG), and Microsoft (MSFT), all at or close to all-time highs.
The other lesson learned this year was the utter uselessness of technical analyses. Usually, these guys are right only 50% of the time. This year, they missed the boat entirely. After perfectly buying the last top, they begged you to dump shares at the bottom.
In 2020, when the S&P 500 (SPY) was meandering in a narrow nine-point range, and the Volatility Index (VIX) hugged the $11-$15 neighborhood, they said this would continue for the rest of the year.
It didn’t.
When the market finally broke down in January, cutting through imaginary support levels like a hot knife through butter ($35,000?, $34,000? $33,000?), they said the market would plunge to $30,000, and possibly as low as $20,000.
It didn’t do that either.
If you believed their hogwash, you lost your shirt.
This is why technical analysis is utterly useless as an investment strategy. How many hedge funds use a pure technical strategy? Absolutely none, as it doesn’t make any money on a stand-alone basis.
At best, it is just one of 100 tools you need to trade the market effectively. The shorter the time frame, the more accurate it becomes.
On an intraday basis, technical analysis is actually quite useful. But I doubt few of you engage in this hopeless persuasion.
This is why I advise portfolio managers and financial advisors to use technical analysis as a means of timing order executions, and nothing more.
Most professionals agree with me.
Technical analysis derives from humans’ preference for looking at pictures instead of engaging in abstract mental processes. A picture is worth 1,000 words, and probably a lot more.
This is why technical analysis appeals to so many young people entering the market for the first time. Buy a book for $5 on Amazon and you can become a Master of the Universe.
Who can resist that?
The problem is that high-frequency traders also bought that same book from Amazon a long time ago and have designed algorithms to frustrate every move of the technical analyst.
Sorry to be the buzzkill, but that is my take on technical analysis.
Hope you enjoyed your cruise.
