It has been said many times that technical analysis is a bunch of voodoo. Now I am not going to discuss the whole efficient vs random market mumbo jumbo but I will say this: technical analysis is a bunch of voodoo and that is exactly why successful traders make so much money putting it to good use!?! Let me explain.
This year alone we have discussed here several instances of “since everyone is watching then it must come true” analysis. Back in the spring it was the dreaded bearish head and shoulders, which turned out to be nothing but a fast move from a false move leading to a great multi-week bullish rally. Then we recently had the bearish death cross “everything is going to hades” moving average crossover, along with its arch nemesis the golden cross, both of which I also wrote about here. Now we have something that I have never heard of, the mother of all bearish indicators, the Hindenburg Omen. It is just these sort of flashing light technical patterns that smart market participants love to take advantage of… and not in the way you think.
1. Technical patterns are made to be broken. If this were not the case then you would never have to set a stop loss. Think about it.
2. It is not history in so much as human nature that repeats itself. Human nature hopes for the inconceivable, wishes for what might have been, and desires the obvious, none of which has any place in technical analysis.
3. No matter what you call it locating stock market patterns entails nothing more than rational humans seeking to make sense of an irrational entity. Just ask BP, water and oil just do not mix.
4. Contrary to popular opinion, history never repeats itself, but instead is reinterpreted in the present.
Now, back to my original statement about voodoo and successful traders. Successful traders trade in the present and listen to what the market is saying right now. They are never hexed nor do they fall under hypnotic spells that foretell the future based on the past. Let’s face it, if some pattern could possibly foretell the future there would be no unemployment lines, no double dip scare, no ballooning debt crises, and no worries about deflation or inflation. Heck, if we could tell the future we would create it! And if we could create the future there certainly wouldn’t be a Hindenburg Omen to worry about, now would it?
DISCLAIMER: I use technical analysis when making a decision to enter a trade. However, I also know that “past performance is not necessarily indicative of future returns.” Enough said.
