Thursday, October 9, 2008

My Problems With Technical Analysis

Another bleeder of a day. All seemed "contained" until exactly 3pm when all hell broke loose. I am still trying to get the license plate of that truck that blasted through at 2:59pm! Any guesses out there as to the catalyst or was this just more of the same long term trend? Leave ideas in the comments section.

Going In to This Market
Once again I offer my usual disclaimer about anything you read here NOT BEING INVESTMENT ADVICE. Blogs are wonderful, and I allow any and all to see inside my head with my posts. What I say or do is for me alone, you must make up your own mind. There will be no bailout if you get an idea from me and lose money, I am sure we are too small to bail!

That said, I reviewed some info, looked at some charts, and followed a gut feeling. I went into this market buying some gold shares of two miners I like. The particular ones are not that important. I did this because I think the dollar rally is not a long term thing with the piles of debt we keep adding. Even if the dollar rallies more because of the whole "safe haven" mantra (which is pure comedy) I still think gold does well as a better safe haven. In a deflationary environment, gold can do well. It can also get it's A$s handed to it. I admit I am putting money at risk in a wild market. I can also guarantee that as I enter the gold miners they will probably collapse! I am doing this with an amount I can lose. I am just offering this to let you know that this is what I am seeing right now. Sound off in the comments section.

My Problems With Technical Analysis
I mentioned above that I looked at some charts which I used to help me make a stock buying decision. I look at everything when I buy stocks. It always cracks me up when somebody says "Next stop for the XYZ is the technical resistance price of XXX" or something to that effect. As if the entire market would stop and all traders everywhere would take a minute and think about point XXX before continuing the day. My favorite is the old "oversold/overbought" oscillator types which are useless and silly.

I know many market folks make their living on this kind of stuff. I also understand that there is a certain science to the chart reading. I think it has some value in stable, normal markets. Where technical analysis breaks down is at inflection points.

I remember Cisco Systems during the tech bust being wildly "oversold" all the way down to a 90% decline. Before that I remember Red Hat being "overbought" as it climbed higher by 300% after that. Right now the "bottom is in" technical crowd at 8700 or so on the DOW are getting excited, but as I looked at the chart I saw no resistance line until 8200 myself. Who is right? Probably neither of us!

I only offer that technical alone is not good at inflection points. Fundamental analysis also has it problems with inflection. Momentum is useless as inflection points are violent with volatility. I think you get the idea.

Right now things are a bit unhinged. It could be the bottom, or it could be a bottom, or it could be just the start down. Only time will tell. What I am saying is that if you are going to be in this market you need to be careful and know what you are trying to do. You must also be ready to be wrong (very wrong) and not get all upset. As they say at Minyanville "return OF capital is more important than return ON capital" at a time like this.

Have a good night.

6 comments:

Anonymous said...

GYSC

"Any guesses out there as to the catalyst or was this just more of the same long term trend?"

It looks like forced selling in order to get US dollars, No other country then the US can simply print them, this is also driving up the YEN which is causing the carry trades to unwind, also the treasury market is simultaneously selling off which one wouldn't expect to see on such a large downward move.

Watch the Yen
http://quotes.ino.com/chart/?s=FOREX_USDJPY&v=dmax

Also the LIBOR USD Overnight
http://www.bloomberg.com/apps/cbuilder?ticker1=US00O%2FN%3AIND

And the TED spread.
http://www.bloomberg.com/apps/cbuilder?ticker1=.TEDSP:IND

This is all about the credit market which has spilled over into the currency market. The stock holders are the dumbest money in the room.

Kevin

norcalboon said...

"return OF capital is more important than return ON capital" at a time like this.

very true

watchtower said...

Are requests being taken for "Friday Night Rock Blogging"?

If so I would like to submit Filter's "Hey Man, Nice Shot"

As far as wading into this market, you'd have to have a big brass set of cojones IMO. Good luck with that. (this is probably why I'm not rich...or dead broke)

These last few days (or rather since August maybe) have been a virtual financial pornocopia.

Unbelievable.

Anonymous said...

Watchtower

I was thinking of Personal Jesus by Depece Mode might be in order.

I'm still hanging tough in the market that bear fund is the only thing saving my ass. SO FAR!
Kevin

watchtower said...

I wish you success Kevin, good luck.

Lisa said...

Time...you're right, only time will tell us where any "bottom" is in the equity markets. Patience is a virtue.
Really like your comments!