Academia vs Technical Analysis

There’s a guy I know who runs a long/short fund and all day long he tells me he’s buying and selling stocks. But he disdainfully refers to technical analysis as “magic” and insists it’s irrelevant.

I have no idea, then, what he is basing these intraday buys and sells on. Can’t be “valuation” because things don’t fluctuate quite that much. Can’t be “sentiment” because the only way to read sentiment short-term is via the charts and price action – that is technical analysis. So I can only assume he’s gut-trading entirely on instinct and guessing. That he’s parsing headlines and soundbites from the media and either going with the flow or against it whether or not he believes the rumors.

God bless him if he can do this profitably and consistently for any length of time. Moreover, god bless his investors for their leap of faith in this cowboy.

For the rest of us, we have technicals to give us context, information for decision-making and situational awareness for risk management.  Even as a fundamentally-oriented person, I can’t imagine doing without charts in some way, shape or form – and I’m not even a formally trained technician.

I bring this up because my pal Dr. Phil Pearlman has an excellent take on why more professionals haven’t accepted the legitimacy and utility of technical analysis into their process yet. Phil chalks it up to philosophical resistance in the halls of academia…

Its absurd that universities still do not formally teach the study of price behavior (technical analysis) and it seems academic finance is way out of touch with real market participants and real risk management.

The study of price behavior is as basic to markets as the study of human behavior is to psychology. It is directly observable. There is price, volume and time. Nothing is hidden or subject to conjecture. There is no implying.

There are really only 3 behaviors – buy, sell and hold and charts are, concretely, the visual depiction of the collective market exhibiting those behaviors.

Patterns repeat themselves. They do not do so perfectly and predictive validity is nowhere near 100% but that’s not the point.

The point is that there are behavioral tendencies which reveal themselves upon disciplined scrutiny and that there already exists a rich written history and archive of those tendencies.

Keep Reading:

On the Absence of Formal Technical Analysis Education (Phil Pearlman)

THIS JUST IN: Why Does Technical Analysis Make Some People So Angry?  (All Star Charts)