Dancing With the Charts: Technical Analysis is Here to Stay

When I started in this business in the early 90s, most of my analysis was done with graph paper, pencils and a word processor (remember those?).  I was a college student in a dorm room in the pre-internet dawn. I had been a long-time Barron’s subscriber as a result of it being forced on me at an early age by my father, who was an avid stock market enthusiast. I would diligently follow and track about 30 or so companies that I would trade from time to time.technical-analysis-volume
Compared to what’s at my fingertips today, my analysis was very inadequate but it was mine and I made it work for me. I also had the beginning of a large rising tide. I didn’t know it at the time of course, but much of my success is a product of that and not my early analysis methods.
I can tell you for a fact that the words “technical analysis” were not found in any of my textbooks or uttered by any of my professors. That’s not to say that it didn’t exist.  Quite the contrary; it’s existed for as long as people have been trading. It’s just that it had no wide acceptance from the academic and traditional investing community.
Information about charts was scarce and good information was not easy to come by. William O’Neil had started the Investor’s Business Daily but that was not in my purview until years later.
CNBC had recently taken over the defunct FNN (financial news network) and had technicians like John Bollinger and a few select others on sparingly with little to no airtime, as their art was widely misunderstood by most, if not all but just a few.
Roll forward to today!  Currently, CNBC, Bloomberg, etc. cannot discuss a stock, future, or index without displaying a chart showing its price over various time periods. I have often witnessed the television anchors drawing trendlines, or what they believe to be support and resistance lines, on the charts.  Almost every day there is a guest analyst who shows his technical interpretation of the markets.
Things have changed!
There are a number of significant advantages to technical analysis when compared to the more widely followed, and vastly more popular, fundamental analysis. The main ideological principles of fundamental analysis are still found in the academic arena (Efficient Market Hypothesis, Random Walk Theory, Modern Portfolio Theory, Capital Asset Pricing Model, etc.).  Most of these theories/techniques however are really just concerned about the reduction of risk in portfolios.
On one hand, followers of fundamental analysis will readily admit that a significant portion of a portfolio’s gain or loss is attributable to market performance, most of their work is directed towards a smaller percentage of the risk/return area, known as non-systematic risk.
But what about non-systematic risk?
Of course, fundamental analysis and most of these academic theories pay most of their attention to that small portion of possible returns in the non-systematic arena.

The Trend of the Market

All in all, I believe they are ignoring the much larger portion, the portion that really counts – the trend of the market. That is the portion technical analysis deals with so well.
Yes, there are a handful of specialized disciplines that are associated with technical analysis that I often question. Yet even those far reaching and esoteric disciplines still accomplish one of the true benefits of this approach – controlling human emotions.
If there was one single event during an investor’s decision-making process that will cause routinely poor decisions, it is the emotion associated with investing one’s hard-earned money. When an investor does not have a disciplined approach, he/she really doesn’t have a chance.
Now this is not about which is “better.” I don’t subscribe to that.

Growing Popularity of Technical Analysis

The best trades, as I can attest, are usually the ones that have a mix of the best fundamental stories (expanding earnings/revenues) and great price action (trends) accordingly. It’s only when the two align that you truly see wealth-creation-type movement.
I know technical analysis is here to stay and it is massively growing in popularity as markets have become highly automated and in turn much more sophisticated. In fact, I believe it is paralleling Moore’s Law (1965), which basically said that technology (think transistors on a circuit board) is doubling every 24 months.
While fundamental analysis makes people feel good because of its association with things we can easily identify with and have often heard about (earnings, dividends, strong managements, good products, etc.), technical analysis gives investors/analysts a much more direct way to close the gap between analysis and action.
When we get right down to it, turning analysis into a substantially less emotionally charged (notice I don’t say emotion-less, as I believe such a thing is impossible to exist in mankind) action is what successful investing is all about.

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