By: Chris Rowe — January 28, 2019
Technical Analysis lovers (probably you): You'll appreciate this story.
Technical Analysis skeptics: Hopefully, today, you'll see the light.
In an old box in my garage, I once found a cassette tape recording of a telephone call dating from... who knows when... probably the late 1970s.
On it was my father - rest his soul - working at Merrill Lynch, where at one point he was their youngest block trader.
He had recorded a call between himself and a client.
This tape was GOLD to me.
You see, I've been on the phone with hundreds or thousands of money management clients. Dad was a bit younger than I am now, when this recording was made.
On the tape, his client is complaining about a couple of incorrect stock price "predictions" my father must have made.
Dad listens politely... then hits the client with a line I thought was genius, at the time I first heard it. It went something like this:
"We do give our best estimates of future price behavior based on the economy and the company fundamentals. I can't guarantee the results and I'm not a fortune teller. I'm more like a weatherman because the weatherman gives a prediction and is usually approximately right about the forecast."
Years later, after much thought, I came to realize that what my Dad had said wasn't "genius". I just thought it was because I was biased. After all, he's my old man. I like him.
I know now that my father's weatherman analogy wasn't "wrong". It's just that he was not (wait for it)... a technical trader.
One can't really draw a true parallel between: the accuracy of a weather forecast, and the accuracy of a price estimate arrived at through fundamental analysis.
But you can draw a true parallel between a weather forecast, and a price estimate determined through technical analysis.
A good weather forecast bases its projections on two things...
Technical analysis bases its price projections on those same two things.
When it comes to investing, "momentum" refers to the historically-established fact that a current market trend will tend to continue. It'll behave like a train, in that it can't just stop and reverse on a dime. For that reason, you can reasonably expect that current price trends will continue in the direction they're already going.
It'd be great if this description were the entire picture, but it isn't. We also need to consider...
As you've probably seen, the meteorologist can give a 10-day forecast with a very high degree of accuracy. But even the best weatherpersons are constrained by a simple rule: The longer the time-frame, the less accurate the forecast.
The situation in technical analysis is similar, but with an important difference.
It's different because, in the financial markets, shorter time frames are more random in nature. So, while technical analysis can be useful in short-term time frames, we'll skip past them for this discussion.
Technical analysis is similar because, once we expand our time-horizon past the "short-term", it works the same way the weatherman's forecast does. The further out you go in time, the harder it is for technical analysis to give you an accurate estimate.
Someone once said (I wish I could remember who), that technical analysis gives us enough visibility to keep us safe, the same way a car's headlights keep us safe on a dark road.
Headlights give us enough visibility to see clearly for about a mile. We can spot upcoming signs, curves and turns... and we can tell before it's too late if a tree has fallen across our path. Our headlights are all we really need to stay safe.
With investing, I've always considered the "sweet spot" time frame to be the "intermediate-term", which is akin to that one-mile zone of visibility from the car's headlights.
To refresh, the loose definitions of the three investing time frames are:
Using technical analysis, it's much easier to navigate the next few weeks or months than it is to navigate the next few days.
Which is why I present my analysis in True Market Insider the way I do. I show what's going on right now and what's highly likely to happen over the next several weeks to several months.
Read through our article archives, and you'll find we have been very accurate in our estimates.
The reason? We never ask technical analysis to do anything it isn't good at doing. We use it correctly, which pays off much more often than not.
So, if I may be so bold...
While technical analysis doesn't confer some magic predictive capability, those who aren't using it as they attempt to time price trends are definitely flying blind.
If that were merely my opinion, I'd be fair to you and say so. But it's more than that.
Like anyone who uses technical analysis, I'm 100% sure my bold statement is in fact... a FACT.
Founder, True Market Insiders