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Market Timing and Technical Analysis, Alan Shaw

Market Timing and Technical Analysis, Alan Shaw

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03/09/2014

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11-~~-
MarketTimingandTechnicalAnalysis
AlanR,Shaw
SCNioi'
Vice
Pre~idl!lIt
MmUlgi'J8
Director
Smitll
Barney,
Harris
U~,.I!rw'l[".
Co.lnc.
THEHISTORYANDEVOLUTIONOFTECHNICAL
SECURITY
ANALYSIS
Overrecent
ycar.:;,
theuseoftechnicalanalysisinthe
investment
declslon-makingprocesshasbecomemorecommonplace.oday's
more
sophisticatedinvestorgenerallyhassometypeoftechnicalapplieerionathand,whether
it
beasimplechadpackage,orasophisticated
computerprognH"H.
Yet',forsornreason,then~isstillsomemisunderstandirrgaboutthetechnician's
era
ft,
50111('
'critics
stillflaunttechnicalanalysisas,
bci
Jig:
akintoastrology,orworse.Asweareupdatjngthiscontributiontothe
Haw1book,
thestockmarketasmeasured
by
theDowJonesIndustria]Averagehasjustsuffereditsgreatestone-day
p"iut
dropinhistory,dropping61.87points.Thefinancialpresswasabundantwithreasonsforthedecline,butemphasishasbeenplacedonthe"cautiouswords"havingrecentlybeenpronounced
by
anumberofstockmarkettechnicians.Thistheory,inturn,resulted
in
a
feature
storyonthe
first
pageofthesecondsectionof
TheWallStreetjournal'.
Theheadline:"StockMarket'sTechnicalAnalystsGe·tNewRespectafterPriceDrop."'Nhile'thearticledoesafford
a
somewhatcredible'
review
of
s'om€'
of
thenegative
technicalfactorsthatledsomeanalyststoofferwordsofwarning,wesupposeto"balance"thestory
it
wasnecessarytoofterafew
words
of
criticism
regardiingthetechnicalapproach..Readingtheviewsofsomewell-known,butobviouslystratght-on-fundamentellyorientedportfolio
312
 
~1
I
MARKETTIMING
ANtDTECHNICAL
ANA'lYSIS
I
313managel's,we'
had
afee]ingof
de}:)
vu,
Said
Ollie,
"These
analysts
~technkians]
might
aswell
look
atrandomnumbers
andtry
topredictthenextone."Anothermanagernoted,"Inthelongrun,
yOll
could
do
as
wenwith
Ouijiboardsortarotcards."Anacademicinput
was
interestingas
wen:
"Thesepeople
make
a
lot
ofpredictions,
andoccasionallyoneofthemwillcomeright,Butlisteningtothemregularlycanbehazardoustoyourwealth.."VVesensethatmorethoughtfulstudentsarefinajlyrealizingthat
all
forms
ofmarket
analysis
havetheirownparticularshortcomings.Ran-domwalkisbeingdebu.nkedbythesametheoreticiansthat
first
supported
it,
Modern
portfoliotheory(MPT)haslostmanyofitsorigmal
followers..
fundamental
earnings
estimates
areoHen
fm'
offtarget;andeconomicforecastscanoftenturnouttobe
ill
founded,orvarygreatlyfromoneeconomisttoanother.
An
formsofanalysisare
'N:aIIy
exercisesineducatedguesswork.Technicalmethods
.JI"C
nodiffer
nt,
One
reason
wesuspectthe
technical
approachhashadmore
than
its
shareofcriticsisbecause
there
haven't
been
all
U'i'i[
manytextbooksavailableonthesubject.Yet
manyeurhuntauve
worksontheapproachcanbe
fmHidwith
copyrightsd.
ling
fromtheturnofthecentury,
if
not
arlier.Bm,)kson
f
undame
11
taIana
lysis
became
gl"t'(l
terinnurnber
Ilfll'I"
thepassageof
tile'
SecuritiesandExchangeCommissionActsof1932"and1933,To
wit,
theso-calledbible'oflundamentalanalysis.
Secw'ily
AI!aly~is,
by
CrehamandDodd,
W}lS
firs!inprintasof
.11j34.
Ourresearchindicatestechnical
analysis
'isthe
oldesl
form
of
securityanalysisknowntoman.Webelieve
CI1;;11'('5
were[irstusedinjapaninthe17th'
cc
11
l'Lury
to
plotthepriceofrice,possiblyrl.Opn:senting
tl~I,;'
earliest
applicationoftrendanalysisdisciplines,Te"hnh:alanalysisisa
(0I11mOI1l
investmenttool
ill
Japantoday.TheJapanesestockmarketisthesecond
largestcapitalizedformaltrading
market
inthe
\v\..nld
(after
the
lYSE).
(lila
mallYJapanese-techniciansuse
metl
oct-more
specialized
to
their
market'strmds,
[11
UwUnitedStates,technicalapplicationscanbe
traced
backover100yeall'swhen
fill1ilI1
ialstatementswere
notreadily
tli..
l
r1i.il1b'ie
foranytypeofquantitativeanal.
'Ish.
In
thelate18005
d..
ndearly19005,
it
a
"researcher'visitedthecorporateofficesofamajorconcern
andasked,
"How's
the
business?"
hewasnodoubt
politelytold,"Itisnoneofvours!"
"'
Overthe
years
wehavelearnedtolookatourroleofatechnicianasbeingcloseinkindtothat
of
anavigator.\tVe
Ulink
ofourclientsasthe"pjlots,"en.trustedwiththe
decision-making
rolein
guiding
their
personalorprofessionalaccounts.Technicalstudiesofthemarket,groupbehavior,orstocktrendscan
determine
evidenceof~hiftingdemand/supplyactivitywhichcan
easily
belikenedtothenavigator'warningthepilotofastormahead.Like
the
navigator,thetechnician
willnotalways.be
correctin
his
readings,orachange
in
"patterns'
 
314
IPil.RT
2:
IECONOMICANALYSIS
couldeasilydeveloprenderingtheoriginalinterpretationinvalid..But
whatevertheoutcome,wesure
woujldn't
wantto
fly
withapilotthat
constantly
ignores
his
navigator.
Ofcourse,
a
record
ofthe
navigator's"calls"shouldbemaintainedaswell.Successinthestock
market
comes
by
minimizingrisk.But,
unfor-
tunately,many
look
atthemarketfromtheviewpointofrewardonly,sometimestakingunnecessaryrisktoachieve
it.
Buyingastockwithapparentstrongfundamentalsandlittleregardforthestock'stechnicalpositioncaneasilyresultina
quick
loss.Manystockscan"top-out"when!as
thesaying
goes,"businesscouldn'tbebetter."Onthe
other
hand,undueriskisalsotakenwhenmakingacorrunitrnentstrictlyon
technical
grounds.Manygood-lookingstockshavefallen
outof
S(l-
calledbase
formations
d1l.1€
toanunexpectedpoorearningsreport.
Therefore
it
seemslogicalthata
combination
of
both
types
ofsecurities
analysisshouldresu]]inbetterdecisionmakingandtheresultsthat
follow.Since
technical
analysisis
prirnnrily
atimingtool,
it
could
besaidthatfundamentalanalysisrepresentsthe"what"input,whiletechnicalanalysisisthe"when,
'I
Cutting
IO$5e~short
iscrucial(or
IClng~terrn
investmentsuccess.We
haveoftenreferredtoasimple
philosophy
wherebywelookatour
decision
makingasanexercisethatcan
result
inonly
oneoffiveeventualoutcomes.Wecan.experienceallunchanged
pcsirlon.
alarge
profit,largeloss;smallprofit,
01'
iI
small
loss,
If
wecan
possibly
eliminateone
of
theseoutcomes,
obviously
the
large
loss,
thenwearemerely
left
with
the
other
tour,
Overanumberof
years
th.€'smallprofits,
lossesandunchangedpositionswill"offset"eachother.Thereforewe
are
lenwithth~
enjoymentofoccasionallybookingthe'largeprofit.Manytechnical
methods
canbe
employed
aslong-term
disciplinesto
guard
against
thelargeloss.We
ate
surethat
other
analytical
inputs
can
beloss-Inhtbltingproceduresaswe]J,
btl
t
theauthorbelievesthe
technicalapproachseemsto
lend
itselfquitereadilytosuchanapplica-
tion.Technicalanalysisisapplicabletoallpricetrendsthatarefounded
upona
fairly
efficientmarketplace
VI/here
buycrsrneet
sellers
in
an
auctionprocess.Assuch,applicationsarenotlimited
to
onlystocksandstockmarkets.domesticorinternational.Indeed,technlcalanalysiscanbeprofitably
utilized
forbonds,
Dr
fixed-incomemarkets,
groups
or
sectorswithinthe
stockmarket,foreignstockmarkets,currencies
and
obviously
nottobeoverlooked,commodities.In
fact,
thereare
probablymoretechnical
methods
aroundtodayforthe
growing
futuresderiva-tivesthan
<lily
otherapplication.Thegrowthofthepersonalcomputerhasledtoaproliferation
of
technicalsoftwareforbothstocksand
commodities,
withthelatterreally
possessing
an
inordinatenumber
ofpackages,manysophisticated,but
a.
goodnumbernotworth
o;J
smallfractionoflheiircost.

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