Saturday, June 09, 2007

The Hazards of Technical Analysis

The problem with technical analysis of the stock and bond market is the same one which plagues the rest of life: you can always find evidence for what you've already decided will happen.

Here are Exhibits A, B and C: three respected technical analysts, all of whom were calling for "more upside" as their read of the charts indicated more bullish action--just days before the market started tanking:

Marketwatch analyst Michael Ashbaugh, whose analysis swings all the way from super-bullish to mildly cautious, saw only more bullish gains ahead: Sentiment backdrop favors further upside (June 5, 2007)

Barron's Michael Kahn has been warning of a toppy, ageing market for weeks, but he caved in on June 4 and hyped retail stocks--a surefire way to lose money as an exhausted, worried consumer finally gets a grip on reality, i.e. his or her wealth and income is declining daily even as their credit costs are rising: Retail Stocks on the Mend (June 4, 2007)

Then there's Ralph Acampora, another perma-bull dating back to Louis Rukeyser's TV entertainment, Wall Street Week; unsurprisingly, Ralph sees bargains galore and a number of stocks set to begin huge multi-year rallies--in other words, same story as always: Charting the Bull's Next Move (June 4, 2007)

In contrast, here were the entries you read here, explaining why bond yields had to rise: Why Interest Rates Will Have to Rise (May 30, 2007)

or going back a bit further, to January's Inflation/Deflation V: Bonds and the Dollar (January 12, 2007)

or March's Bonds, Interest Rates and Gold (March 6, 2007)

And why the stock market looked ripe for a decline: Don't Cough (May 12, 2007)

The Moon's a Balloon--And About to Pop (May 18, 2007)

Stock Market Needs Suckers, John Q. Public Wary (June 1, 2007)

Friday, the Bulls roared back, reclaiming over 1% of the week's losses. So does this mean the Bulls are back in charge and the three analysts are absolutely right? Maybe. Here is a 5-year chart of the long-bonds exchange-traded fund, the TLT. If you want to find some bullish evidence in this chart, you have quite a challenge:

Please go to www.oftwominds.com/blog.html to view the charts.

And here's the five-year chart of the Nasdaq, which I prefer over the narrow 30-stock Dow Jones Industrial Average, and the S&P 500, which has been distorted to some degree by the huge gains in financials (housing/mortgage/private equity debt bubble) and energy (oil rising from $20/barrel to $65/barrel). How low the Nasdaq will go this time around is anyone's guess, but the chart offers little support to the perma-bull chartists quoted above.

Am I just "finding Bearish cues" in these charts because that's what I've decided will happen? Perhaps--so look at the charts and make up your own mind about what they're indicating.

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