At the one extreme we have exotic financial derivatives that no-one knows how to value as well as opaque bundles of high risk loans and low risk bonds that no-one knew how to value either. At the other extreme, we have the simplistic nonsense known as technical analysis that anyone can understand, but happens to be bollocks. No wonder the world financial system is such a ferrel beast.
[DDET Read More]
Age write Lucy Battersby has produce this gem of an article, that spruiks the sage thoughts of Paul Ash, president of the Victorian chapter of the Australian Technical Analysts Association. It is all about the much-buffeted AUD.
It turns out that the Aussie went down for a while, then up, then down, then up a little bit, then down a tiny bit. This is clearly big news. But not one to take things at face value, Ms. Battersby notes that the Aussie is
at a moment of indecision that could see it continue downwards or climb and break though resistance.
Let’s rush straight out and put some money on it to……go up?… go down..? Hell, let’s just buy a Tatts ticket.
But it gets more specific (and consequently more wrong) as the article progresses. Mr. Ash claims that for the next day “it is critical if the AUD can spend 24 hours above 90 cents.” Like Uri Geller and John Edwards though, he never actually completes the prediction of what might happen after that. But he is clearly saying that Tuesday Feb 23 is critical. Forget any notion of EMH or martingales. The claim is that the value Vt of the aussie dollar satisfies the condition
if inf{Vt:t ε Feb 23} > 0.90
then ∂EVt/∂t>0 ….. or perhaps ∂EVt/∂t<0. Take your pick.
Ms. Battersby then chimes in to describe technical analysis as
a search for patterns which not only “provides a theoretical basis” for traders but “removes sentiment and gut feeling” from trading.
The straw man strikes again. The only possible trading strategies apparently are pattern searching or gut feeling. Forget any research on the company you want to own. Someone tell Warren Buffet and his acolytes.
But I have been a little unfair to Mr. Ash in claiming that he never makes a prediction. He does actually come out with one towards the end. He says that if the AUD gets above the “non-confirmed resistance line” of 91.7 cents “then we would say with confidence that the AUD is on an upward trend.”
Anyone heard of a tautology? Since it is below 91.7 now, if it gets to 91.7 it will be on an upward trend. Gentlemen. Place your bets!
Hat tip to Mike Smith for slipping this article under my door.
[/DDET]
Core Economics 
There’s a fair bet that the dollar has a 50-50 chance of being above the average value.
LikeLike
The AFR used to have a weekly column with the same nonsense, it was basically their version of having a horoscope.
I think it must have become too embarrassing to keep printing it, it was just a few stock charts with lines drawn next to any straight-looking bits.
LikeLike
“Mr Ash said the next resistance level would be US92.7¢, a 100 per cent Fibonacci retracement of the previous range – in other words, a return to the last significant high.”
What wisdom!
LikeLike
OK, chartists are an easy target. But how many of us can honestly say that we never check the price history of a share before deciding to buy or sell?
LikeLike
True dave. But I am very ashamed of myself in the morning.
LikeLike
Charting is just the human response to the need for structure in a random world.
The idea that share prices or exchange rate history has no bearing on the future performance is just too difficult to deal with. I would argue that chartists are the very people who should not be active traders.
LikeLike
I’m desperately trying not to take the side of the Chartists, but addressing Name (required)’s comment about share price history having no impact on future performance – how does that explain ‘momentum buying’ (pass the parcel) or ‘panic selling’ when the herd moves in force? There would appear to be an expectation built in of either good or bad times continuing even if ‘trend lines’, ‘ceilings’, ‘floors’, etc are arbitrary constructs in the minds of chartists.
LikeLike
What I love about chartism is how its combines mathematics and mysticism. Who could not be enchanted by a “fibonacci retracement”?
LikeLike
“Finonacci Retracement” – is that the new Dan Brown novel?
LikeLike
An amusing piece. We love stats don’t we.
LikeLike
Funny, in 2001 when the AUD was tanking, my technical models were telling me to stay short below 60 cents, while every bank economist talking-head was calling for it to bounce. Yes, it’s now around 90 cents, but it went to 48 cents in the interim. Now all the bank economists are calling for parity, so I’m not so sure.
Granted it doesn’t prove technical analysis works – personally I find betting against bank economist talking-heads equally rewarding. Particularly when they reach a consensus.
LikeLike
“Technical analysis” seems like the financial market equivalent of roulette “systems players”.
LikeLike
What’s wrong with you people???!!!! I can’t believe you’re stupid enough to frown upon people who technically analyse. This must be one of those sicko fundamentalist wedsites……….who think it’s ok to go around blowing stuff up! You already blew up the world economy what’s next?!
LikeLike
DP on February 25th, 2010 3:52 pm: “ow does that explain ‘momentum buying’ (pass the parcel) or ‘panic selling’ when the herd moves in force?”
It doesn’t. This is simply the Lemming Syndrome – buy because everyone else is buying or sell because everyone else is selling.
LikeLike
DP on February 25th, 2010 3:52 pm: “There would appear to be an expectation built in of either good or bad times continuing even if ‘trend lines’, ‘ceilings’, ‘floors’, etc are arbitrary constructs in the minds of chartists”.
What would be the difference with me buying a lotto ticket “with the expectation of good times”?
LikeLike
I understand that daily share price movements are statistically independent. The difference between a lotto ticket and a share price is that the lotto numbers are randomly generated/allocated but share prices are highly visible and people do buy or sell based on yesterday’s information as well as tomorrow’s perception or expectation. EMH is built on this transparency/accuracy of information. Nobody expects the share price to be radically different from day to day even if strictly speaking they should. Fortunes were made and lost on expectations of the ‘Great Moderation’ versus the GFC.
LikeLike
DP,
“I understand that daily share price movements are statistically independent.”
Your understanding is wrong. There are quite strong autocorrelations in share price time series. If winning lottery numbers were similarly correlated, you would likely get “technical analysis” of these too.
LikeLike
Yes, I should have stated that for an individual share the price movement on one day is independent of a price movement of the same share on a different day. The correlation you refer to is the relationship of price movements between different shares. That was the point I tried to make – if ineptly.
LikeLike
Dave, DP: So are you saying that there is persistent autocorrelation across different shares i.e persistent multi-variate auto-correlation. On what time scale? On tick time scale I might believe.
And your model/explanation of this auto-correlation persisting in the face of the arbitrage opportunity is…?
LikeLike
I intended to refer only to the relationship (correlation) between different shares – and their price movements -at the same point in time. (
For the case of share prices there is no auto-correlation otherwise the chartists could potentially be correct. In a real-world market that presumably operates under the EMH, auto-correlation does not exist.
I feel as if I’m repeating the obvious to wiser persons.
LikeLike
DP,
“Auto-correlated” means correlated with itself. Share prices are strongly mean-reverting. If they weren’t – and share prices were just random walks – the price volatility seen in a day would be multiplied many times over a period of weeks or months. This does not occur.
So, chartist can potentially be correct, which is my point. Are they actually correct? I very much doubt it.
LikeLike
Dave,
Chartists are trend spotters. They can be lucky or unlucky. There is no statistical validity to their craft.
Mean reversion may occur over arbitrary time frames but that does not make it predictable. Last month’s price does not drive this month’s price. The relationship is not causal in any respect. In the case of the (in)famous Big Mac index one can make long-term predictions that exchange rates that will revert to its PPP value as measured against a benchmark (USD), but that does not supply any meaningful predictive capability to the exchange rate next week or next month. That is a random walk. This applies just as equally to share prices.
If one could predict future values of any individual share price from past values then the EMH (Efficient Market Hypothesis) is superfluous. Any price differentials between the past and the future are likely to be an asymmetric information issue that is exploited not a reversion to the mean.
Interestingly enough, last week’s Buttonwood column in the Economist alludes to 30 year cycles in US and UK real (inflation-adjusted) equity prices. In this case the correlation appears to be with the size of the 35-54 year-old cohort in the population. (The prime equity investment segment!) That would seem to imply some sort of predictive model (weak or strong as the case may be) based on that particular variable, but only for a whole market, e.g. DOW or FTSE, not for any individual share. The EMH still holds.
LikeLike