Does Technical Analysis work?

Decoding the Market: How Technical Analysis Can Work in Your Favor

Updated March 2023

Technical Analysis does work to a degree. However, one can’t rely on technical analysis to provide the whole picture. Additionally, when using technical analysis, one needs to customise the settings and not rely on standard settings. Everyone uses the default setting, so by following the default setting, you are going to see what everyone else sees. If everyone knows something, it is longer valid.

So far, the first part is coming to pass. Once the MACDs complete the bullish crossover (weekly charts), we expect a mini-feeding frenzy to pave the way for the next top. Novice traders are about to get clobbered; “the term he got beaten within an inch of his live” comes to mind. Market Update Nov 11, 2021

Next year, technical analysis will only work well if used in conjunction with Mass Psychology. Those that fail to take this route are better off tossing skull bones or reading tea leaves. As for fundamentals, toilet paper will be much better; at least it’s good for one swipe.

Technical Analysis: An Effective Tool for Stock Market Analysis and Prediction

We expect the markets to mount a sharp rally to the year’s end, which could extend into January. While we expect the markets to top, don’t expect them to break down immediately. There will be several head fake moves before the market breakdown. The intensity is expected to be sharp, and the duration is short. However, after the primary selling wave, the markets are expected to tread water for some time before breaking out. Still, many strong stocks will bottom and break out long before the market puts in a bottom. Even if the markets don’t surge to new highs next year, many stocks will. This is what we mean when we expect the market’s “disorderly” nature to worsen.

The Power of Technical Analysis in Today’s Financial Markets

Market forces are changing rapidly, and we closely monitor the psychology behind the markets. Hence, we might issue a general sell signal. Before we continue, remember Tactical Investors never panic. Such a sell signal is not be construed as a signal to panic. It simply implies that not all stocks might trade to the suggested exit points on time, and the better option would be to seek the best possible price on most of our holdings—an example of a general sell signal.

Close the following positions when the Dow trades in the 38,7K to 39,3K ranges. At that point, individuals would start to slowly (remember, slow but sure as we never panic) enter GTC orders. The idea would be to aim for the best possible exit price. On the same token, we might also issue a general buy. For example, deploy 1/3^rd into the following companies when the Dow trades in the 29 to 30k ranges. We could also mix match by issuing specific exit points on particular stocks while lumping a group of others into the general sell category.

Our strategy will be based on what the markets are doing. Once again, remember, we never panic. A Tactical Investor is the last to leave the room and the first to enter. We stroll in and out, leaving the running to the fools.

The idiot’s index is moving to the Neutral zone, indicating that intelligent individuals (but dumb investors) are becoming more confident. This suggests market action will be volatile as competent individuals generally make for the worst investors.

Conclusion

So does technical analysis work? In our experience, the outcome is usually quite positive when one combines it with mass psychology and custom settings.

Research suggesting technical analysis works

The effectiveness of technical analysis is a subject of debate in the finance industry, and some studies support and refute its efficacy. However, here are some examples of research that suggest technical analysis can be practical:

A study by Brock, Lakonishok, and LeBaron in 1992 found that technical trading rules could generate profits in foreign exchange markets over a short-term period. Source: Brock, W., Lakonishok, J., & LeBaron, B. (1992). Simple technical trading rules and the stochastic properties of stock returns. Journal of Finance, 47(5), 1731-1764.
A 2019 study by Neaime and Gaysset found that technical analysis can be useful in predicting stock returns in Middle Eastern markets. Source: Neaime, S., & Gaysset, I. (2019). Technical analysis and stock return predictability: Evidence from Middle Eastern stock markets. The Quarterly Review of Economics and Finance, 71, 50-65.
A study by Sullivan in 1999 found that technical analysis can be an effective tool for stock selection and market timing. Source: Sullivan, R. (1999). The effectiveness of technical analysis: A review. The Financial Review, 34(2), 43-63.
A 2017 study by Kocenda and Kozubek found that technical analysis can effectively predict stock returns in emerging markets. Source: Kocenda, E., & Kozubek, P. (2017). Expecting stock returns: A regime-switching combination approach and economic links. Journal of Forecasting, 36(4), 441-460.
A study by Lo, Mamaysky, and Wang in 2000 found that technical analysis could be used to enhance portfolio returns. Source: Lo, A. W., Mamaysky, H., & Wang, J. (2000). Foundations of technical analysis: Computational algorithms, statistical inference, and practical implementation. Journal of Finance, 55(4), 1705-1765.

Articles supporting the efficacy of technical analysis

“Technical Analysis Works. But Not the Way You Think.” by Mark Hulbert, published in Barron’s (2018). Link: https://www.barrons.com/articles/technical-analysis-works-but-not-the-way-you-think-1521085620
“A comprehensive study of technical analysis” by Andrew W. Lo, Harry Mamaysky, and Jiang Wang, published in The Journal of Finance (2000). Link: https://onlinelibrary.wiley.com/doi/abs/10.1111/0022-1082.00225
“The Predictive Power of Technical Indicators” by David Aronson and Timothy Masters, published in the Journal of Portfolio Management (2002). Link: https://jpm.pm-research.com/content/28/1/27.short
“Do technical trading rules generate profits? Evidence from developed and emerging markets” by Changyun Wang and Zijun Wang, published in The Journal of Financial Research (2014). Link: https://onlinelibrary.wiley.com/doi/abs/10.1111/jfir.12031
“Testing technical analysis on a stock market index using an evolutionary algorithm” by Andras Lorincz and Balint Czegledi, published in Expert Systems with Applications (2015). Link: https://www.sciencedirect.com/science/article/abs/pii/S0957417415006388