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Saturday, November 26, 2022

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Let’s Get Technical

Here’s a post on The Big Picture blog of Barry Ritholtz’s, responding to Feliz Salmon’s article "Adventures in Technical Analysis, Jim Cramer Edition" posted here yesterday.  Here’s Barry’s thinking on the subject.  – Ilene

Let’s Get Technical

Excerpt:

"Ninety percent of science fiction is crap, but then ninety percent of everything is crap."  –Theodore Sturgeon

Yesterday morning, Portfolio’s Felix Salmon had a post "Adventures in Technical Analysis, Jim Cramer Edition."

I cannot put aside the fact that Cramer is not, and has never been, any sort of technician. We do not dismiss medicine because accountants cannot do open heart surgery, so it seems kinda odd to use a bad technical call of Cramer’s — an admitted non-technician — as proof that technicals are worthless ("astrology!"). 

But what really caught my attention were the following paragraphs, which amount to the standard criticism of Technical Analysis:

"They all do it: even much smarter and much more analytical traders like Barry Ritholtz do it too. Do what? Resort to "technical analysis", which is the art of drawing lines on charts and extrapolating from them what the market is going to do next…"

There are so many different ways to take this down, its hard figuring out where to start. Let’s begin with a definition of what technical analysis is not:

Technicals are not magic. They are not a way to forecast the future, nor are they a guarantee of future profits. They are not based on someone’s estimate of what future earnings might be, nor do they require you to guesstimate management’s skill set or presume the desirability of a new product. Pure Technicians don’t even listen to conference calls or even talk to management.

Technicals can be, however, far less squishy than fundamentals. Technicians use the data that is generated by the markets itself: Price and volume to start, then many other data points and derivatives thereto.

From this basic data, there are many variations of Technical Analysis:…

"The bottom line is that TA is merely a tool, albeit one used more skillfully by some than others…"

 

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