Technical analysis. Everyone knows what this is today. 20-30 years ago it was considered some sort of magic or even “black magic.” It was revered as “the secret tool” and a way to gain an edge and make money. In some respects this was very true, technical analysis could be used to size up whatever market you were trading and get a picture as to oversold or overbought. Regular patterns would occur over and over again which gave you better “odds” while trading. This still holds true today but… to a much lesser extent and now nowhere near as good a predictive tool.
So what happened? First, technical analysis became “popular” and once everyone knows something… it becomes no longer valid or less so. Secondly and more important in my mind, fiat or fake currency as it is causes bad decision making because the values themselves become skewed or altered. Investors make bad decisions because they cannot correctly judge risk. This is illustrated today by interest rates being forced lower by the Fed when market forces would have them much higher to compensate for “risk.” A couple of examples are housing prices being as high as they still are (even after crashing) because the prices are made “affordable” by unjustifiably low interest rates. Another example is that PE ratios in the equity markets are higher than they should be because they are calculated against Treasury (supposedly risk free) interest rates. These are both “fundamental’ investment decisions made by investors that technical analysis cannot take into account.
Thirdly, when a government can create any amount of “money” that it wishes, it can use this money to “push” markets around. They cannot turn it completely upside down but they can surely “paint” and create false pictures. These false pictures are seen every single day as markets react 100% opposite to what common sense would tell you should occur. This can (and is every day) be done in the short term but cannot change the basic direction that Mother Nature would deem to be correct. These manipulations however can alter time frames by either postponing or speeding up moves in markets depending on what the manipulators deem to be for the “greater good.”
When I hear for example “Elliot wave this or Gann that” I just cringe. I cringe because two separate “experts” can read the same charts and come up with two diametrically opposed conclusions. They will talk all sorts of mumbo jumbo with long and detailed explanations to support their case. Both cases can sound logical at the same time which brings us back to “flipping a coin.” I ask you, what’s the difference between flipping a coin as to market direction or flipping a coin as to which “expert” is correct? There is no difference. You can of course follow the track records of analysts which can be helpful because some are more right than others or “recently” more right and have a hot hand. The problem with this is that their hand may all of a sudden go cold… for years to come. A couple of examples would be Elaine Garzarelli and Robert Prechter making great calls before the 1987 crash only to never be correct again. Prechter for example would have not only had you out of Gold since 1999, he would have suggested that you be short which would have caused your financial death long ago.
I thought about coupling this piece with one on “fundamentals” tomorrow but I see no need as the topic would be quite short. Yes, I believe that you absolutely MUST use the fundamentals to create your big picture and then position yourself. BUT it is very important as to how you create your big picture. You can watch the cheerleaders on CNBC and Bloomberg, take the government economic reports at face value and listen to your stockbroker who is compensated to blow smoke up your butt, make you feel good and move your money “often.” OR, you can use some common sense and believe “your own eyes!” For example, when you hear “numbers” released by the government that don’t “sound” right… they almost surely are not. Just use the common sense that you were born with and be skeptical of what you hear and read. Investigate for yourself. Dig for the truth… and THEN formulate the big picture. If you want to use technical analysis using trend lines or go contrary to an overly bullish or bearish public, great, but don’t go against the trend of your big picture. …Which is why for the last 13 years I have NEVER tried to call a “top” in Gold. My “big picture” tells me that Gold should be now and will be multiples higher than where it is today so why would I worry or try to profit from a 10% or even 20% drop. THAT is a mugs game and one that technical analysts will assure you they have mastered!