Does Technical Analysis work?

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 1/3rd 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.

 

Idiots index

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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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

  1. “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
  2. “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
  3. Reasons Why Technical Analysis Really Works: 8 Reasons Why Technical Analysis Really Works – TradeVeda
  4. Technical Analysis: What It Is and How to Use It in Investing: Technical Analysis: What It Is and How to Use It in Investing (investopedia.com)

Other Articles of Interest

Working Poor: Masses struggle while Fed Bails Out Banksters

The Working Poor The Fed paid banks $7 billion last year to do nothing with their money. Why is the ...
Read More
gold

Benefits Of owning Gold: Hedge Against Uncertainty

Benefits of owning gold March 2023 Owning Gold has become increasingly beneficial due to its growing demand and limited supply ...
Read More

Negative Rates & The Devalue Or Die Era

Negative Rates & The Devalue Or Die Era The “devalue or die” currency wars are picking up steam; Japan’s central ...
Read More

Simplifying the Complex: Understanding Psychology for Dummies

by Sol Palha, Lead analyst at Tactical Investor Psychology for Dummies: Understanding the Mind of the Masses Updated  Dec 2022  ...
Read More

Next American Disaster: Student Debt

Calamities are of two kinds: misfortune to ourselves, and good fortune to others. Ambrose Bierce [color-box color="blue"]Student debt is increasing ...
Read More

Kurds seize key rebel-held airbase in northern Syria

The Kurds are one of the best fighters in the Middle-East, even the woman know how to fight, and most ...
Read More

Central bankers embrace Negative interest rate wars

Don't part with your illusions. When they are gone, you may still exist, but you have ceased to live. Mark ...
Read More

Average Student Debt & Student Debt Clock

Average Student Debt The, key ingredient for any crisis are greed, desperation and a fake sense of need, regardless of ...
Read More

One chart illustrates economic recovery 100% fiction

They say a picture is worth a thousand words and this chart is probably worth a lot more.  It illustrates ...
Read More

3 charts illustrating American Economy in trouble

American economy According to the BLS, the unemployment rate is roughly 5%. Shadow statistics, on the other hand, states that ...
Read More

Currency wars intensify: BOJ Stuns markets with negative rates

The BOJ (Bank of Japan) apparently understands that this economic recovery is nothing but rubbish as they lowered rates into ...
Read More

Dealing with stock market losses: A cry for help

I'm not afraid of storms, for I'm learning how to sail my ship…Louisa May Alcott “I am trading poorly. I ...
Read More

Ticking Time Bomb:Student debt increasing 2800 every second

The clock below shows you Ticking Time Bomb:Student debt increasing 2800 every second Student debt is a time bomb waiting ...
Read More

America’s Economy: Is This Recovery Real?

Updated April 2020 America's Economy and the Stock market The Stock market does not care that  America's economic recovery is ...
Read More

Stock Price Manipulation: How To Profit From It

Let us be thankful for the fools. But for them, the rest of us could not succeed. Mark Twain 1835-1910, ...
Read More

Western media: China Won’t be Asia’s Dominant power

[color-box color="blue"] Why China won't be Asia's dominant power? China may be Asia's economic powerhouse but it won't become the ...
Read More

1987 Market Crash:Investors That Focused Market Recovery Made Money

Do not wait for ideal circumstances nor for the best opportunities; they will never come. Anonymous The 1987 Market Crash ...
Read More

Marc Faber Wrong: black Monday crash a buying opportunity

Black Monday crash: All Bark & No Bite Dr Faber aka Marc The Bust Faber continues to provide the best ...
Read More

Brent crude oil price today: Why Did Oil Crash?

Brent crude oil price today: Why is oil crashing The fundamentals in the oil market are simply horrible and based ...
Read More

Raytheon Company setting up bullish pattern

Company Background [color-box color="green"]Raytheon Company, together with its subsidiaries, is a technology Company that specialises in defence and other Government ...
Read More

No U.S Economic recovery:1 in five children on food stamps

 Updated June 2017   There is No U.S Economic recovery; 1 in five children on food stamps  If the economy had improved ...
Read More