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Is technical analysis mere hocus pocus?

Is technical analysis mere hocus pocus?

As an investor, you’ll have seen some market commentators extol the virtues of ‘technical’ analysis, or charting.  And it’s easy to believe there is some science behind the approach.  But is there really?  And is it as successful as fundamental analysis, which looks at the earnings and cash flow of a business?

You should know that some decades ago I entertained the idea that there was merit in the approach but as access to computing power and funds grew, a colleague and I were able to test the veracity of all the common charting devices promoted by advocates of technical analysis.  What we discovered, and with the benefit of time, was that none of them worked better than random and only a few, in combination, produced results with a positive mathematical expectancy but even they failed to endure over time or when scaled.

Technical analysis and charting has broad appeal because we want to believe that there is an effortless way to make money.  And many promoters, if they don’t truly believe in what they are doing, are content to sell the promise of easy money.  Of course, the path of least resistance has enormous appeal – what could be better than looking at a computer screen and buying ‘when the red line crosses the blue line’ and selling when they reverse?

In reality there are two paths on which to approach the stock market.  The first is as a venue to purchase pieces of businesses whose long term value is determined by the path and magnitude of their earnings.  As investing legend Peter Lynch once said: stocks always follow earnings and cash flow – focus on them, and you will get the stocks right.

The alternative approach is to treat stocks like chips that rise and fall on a computer screen.  But betting on the ‘ups’ and ‘downs’ is an approach that treats the stock market as nothing more than a casino.  Charting is only concerned with the ups and the downs and many advocates of technical analysis suggest that even knowing what the underlying company does is irrelevant.

Warren Buffett once advised: “When promised quick profits, respond with a quick ‘no.'”

Indeed, in reference to charting Warren Buffett has made several comments:

“Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”


“Before reading (The Intelligent Investor) …I tried my hand at charting and using market indicia to predict stock moments …I listened to commentators. All of this was fun, but I couldn’t shake the feeling that I wasn’t getting anywhere.”

And most tellingly, Buffett reportedly joked about charting with an audience at Vanderbilt University in 2005:

“I realized that technical analysis didn’t work when I turned the chart upside down and didn’t get a different answer.”

In 2014, two researchers from the Netherlands, Arvid Hoffmann of Maastricht University and Hersh Shefrin of Santa Clara University published a paper that specifically measured the results of trading by investors who relied on technical analysis. In their paper entitled Behavioral Portfolio Analysis of Individual Investors*, they analysed the trading results of Dutch investors over six years between 2000 and 2006 to “gain a better understanding of the relations among individual investors’ decision-making, the processes leading to these decisions, and investment performance.”

In 2006, the source of their data, a brokerage firm, surveyed all of its clients asking which techniques they employed to make investment decisions.  About 32% of these investors stated they used technical analysis exclusively or in conjunction with fundamental analysis and the researchers used a sample of 5,500 clients to conclude:

“In line with our expectations, we find that investors driven by objectives related to speculation have higher aspirations and turnover, take more risk, judge themselves to be more advanced, and underperform relative to investors driven by the need to build a financial buffer or save for retirement. Somewhat to our surprise, we find that investors who rely on fundamental analysis [despite tending to be overconfident because of the direct relationship between confidence and information] …outperform investors who rely on technical analysis.

Hoffmann and Shefrin found the investors using technical analysis had lower performance, on average, of about 8.4% per year.

Many investors approach me and tell me that they have found a charting technique that “works”.  It is possible to find methods that work for a while or even a few that have a sustainable ‘edge’ but to really test the method one needs to measure against a benchmark.  So before backing your previously undiscovered winning charting technique, go back and check whether it works better than simply buying and holding?  I have yet to hear of one that does.

Many articles debating the relative merits of fundamental and technical analysis conclude with a statement such as “the debate continues”, But for us, there is no debate.


Roger is the Founder and Chief Investment Officer of Montgomery Investment Management. Roger brings more than two decades of investment and financial market experience, knowledge and relationships to bear in his role as Chief Investment Officer. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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  1. Today

    Sell all BBUS at 5.13 = $ 22, 653

    Buy $22,653 worth of MOGL at 3.38

    New position at end of day
    $ 22,720 + $ 66 707 =$89 ,427 worth of MOGL at 3.39

  2. on 20th March, correction BBUS bought at 5.08( not 3.08)

    Today MOGL worth $ 89,729 at 3.42
    Sold $22,432 worth of MOGL
    Bought $ 22,432 worth of BBUS at 5.08

    New position – $67,297 worth of MOGL at 3.42
    – $22, 432 worth of BBUS at 5.08

    Total = $ 89,729

  3. Today MOGL worth $ 89,729 at 3.42
    Sold $22,432 worth of MOGL
    Bought $ 22,432 worth of BBUS at 3.08

    New position – $67,297 worth of MOGL at 3.42
    – $22, 432 worth of BBUS at 3.08

    Total = $ 89,729

  4. Sell all BBUS at 4.74 = $24,918
    BUY $24,918 worth of Mogl at 3.39

    New position $64,024 + $24,918 = $ 88,942 worth of Mogl at 3.39

  5. Today BBUS worth $ 30,108 at 5.05
    MOGL worth $ 59, 897 at 3.36

    Sell $3,560 worth of BBUS at 5.05
    and Buy $3,560 worth of MOGL at 3.36

    New position $26,548 worth of BBUS at 5 .05
    $ 63, 457 worth of MOGL at 3.36

  6. Today BBUS at 5.26 = $ 46,130
    sell $14, 770 worth of BBUS , and buy $14,770 worth of MOGL at 3.32

    New postion
    $31 360 worth of BBUS at 5.26
    $ 44414 + 14770 = $59, 184 worth of MOGL at 3.32

    Total $90, 544 negative (- 9.54% since 17/3/17)

    Now combining Value investing with Technical analysis , hedging and speculating maybe at times.
    Taking a more conservative approach.

  7. SOLD all Yank Today at 12.95 = $23,101
    Sold all EEU Today at 15.21 = $ 23,262
    Sold All PMGOLD Today 17.00 = $44, 317

    Bought $ 90,680 worth of QAU at 13.80

    Total $90,680 negative (- 9.32% since 17/3/17) ( no commissions included).

  8. Sold half EEU at 15.28 = $23,369. bought $23,369 worth of Yank at
    used $4,553 cash to buy PMGOLD at 17.00

    New position
    $ 23,369 worth of Yank at 13.10
    $ 23,369 worth of EEU at 15.28
    $39 , 764 + $4,553= $44,317 worth of PMGOLD at 17.00

    Total $ 91,055 negative (- 8.95% since 17/03/18) . ( no commissions included).

  9. – on 15th Feb sold $24,380 worth of PMGOLD at 17.08 , kept $4o,oo worth of PMGOLD. sold all BBUS at 5.13 = $21, 952
    Bought $46, 332 worth of MOGL at 3.27 ,
    Cash still $4, 553 cash.

    Today sold all MOGL at 3.29 at $ 46, 615 and bought $46,615 worth of eeu at 15.24

    New position Today at close, PMGOLD at 16.93 worth $ 39,600 , EEU at 15.24 worth $ 46, 615
    Cash l $4, 553 cash.

    Total $90,768 negative ( – 9.2% since 17/3/17) (long term trading for shares on the up side harder in these conditions, i will start shorter trades to hedge PMGOLD).

  10. Sold all BBUS Today, bought Mogl.
    position approx 45% PMGOLD, 50 % MOGL, 5% cash . Will calculate exact position later.
    Hedging from here on for a while . Market too crazy to speculate. A may be hedging with BBUS Later.

  11. I could be very wrong, but this looks ,feels and indicates 1987. This would be horrible for the Australian economy. I run a small company and do not wish for it. In a lot of ways lets hope i am wrong.

  12. position on the 8th Feb was $63,743 worth of PMGOLD at 16.83 , $22, 765 worth of BBUS at 5.32 ,
    and $4, 553 cash.

    Today PMGOLD at 16.92 , worth $ 64,084,
    BBUS at 5.46, worth $23,364

    Sold $4,600 worth of PMGOLD at 16.92
    Bought $4,600 worth of BBUS at 5.46

    New position at this time is PMGOLD at 16.92 , worth $ 59,484 , BBUS at 5.46, worth $27,964.
    $4, 553 cash. Total $92,001 Negative (-7.99) since 17/3/17 (commission costs not included) .

  13. This market global market ( all assets ), need to bounce back tonight or next week will be deflating to say the least. Value buying may be closer than what you think.

  14. Today
    – Sold SVL at 0.08 = $8,692 ,- Sold RMS at 0.435 = $ 10,116, – sold MML at 0.41= $ 16, 400 ,
    – sold MNRS at 3.48 $ = 45,276, – kept PMGOLD at 16.83 = $ 10,577

    Bought $ 53,166 worth of PMGOLD
    Bought $ 22, 765 worth of BBUS

    New position $63,743 worth of PMGOLD , $22, 765 worth of BBUS , $4, 553 cash.
    negative (- 8.94%) since 17/3/17 (commission costs not included) .

    Hard market, conditons changing fast.

  15. Before the end of the month, maybe a rebound may come for the global markets. After that dead cat bounce(2-4 months) , shorting the global will be very rewarding.

  16. New position at close today

    PMGOLD at 16.81 , $10,564
    MNRS at 3.76 , $48,919
    SVL at 0.090 , $9,778
    MML at 0.45 , $18,000
    RMS at 0.465 , $ 10814
    Total $ 98,075 – 1.93 % since 17/3/17 (commission costs not included) .

    I believe patience will win the day over the two year period.

  17. The S @ p, Dow and Nasdaq are at a pivital turning point to the down side. I believe this will be too much to take and lead USA markets on a big correction / maybe leading into crash ?. Too many positive people. I heard one guy in the media say we at the start of a 30 year bull run!!. I have never seen the long term technical analysis so over bought going back to at least 1988. Good luck if you buy now.

  18. US Dollar in crash mode, bonds US in trouble. 4 big Australian banks in crash mode. Gold and silver could scream up. All based on my technical analysis. Can you explain using fundamentals WHY ?. I assume just too much debt. Maybe more complicated than this ?.

    Thanks Bruce

  19. New position at close today

    PMGOLD at 16.84 , $10,582
    MNRS at 3.89 , $50,610
    SVL at 0.090 , $10,000
    MML at 0.50 , $20,000
    RMS at 0.435 , $ 10116

    Total $101,308 1.3 % profit since 17/3/17 (commission costs not included) .

  20. PMGOLD position at 16.87 worth $40601

    sell 30,000 worth of PMGOLD at 16.87

    Buy $10,000 of SVL at 0.090

    Buy $20,000 Of MML at 0.50

  21. PMGOLD at 16.77 = $50,360 MNRS at 3.79 = $49,309

    sell $10,000 of PMGOLD at 16.77

    new position $ 40360 PMGold (16.77),
    $ 49309 MNRS(3.79),
    $ 10,000 cash

    $99,669 – 0.331 % since 17/3/17

    (commission costs not included) .

  22. PMGOLD at 16.81 =$50,480 , MNRS at 3.85 = $50,089 (end of trade 3/1/18)

    Total = 100,659 0.66 % profit.

    (commission costs not included) .

  23. sold half PMGOLD position at 16.81, put this on MNRS at 3.88.
    will post later today $ positions after commissions.

  24. PMGOLD at 16.70 end of trade (2/01/18) . $ 100,300 + 0.3 % since 17/3/17.
    Banks are in big trouble. I am possibly now going to trade into overseas stocks through ETF’s going forward. Finiancial stocks are under pressure in Australia.

  25. Glad i don’t own banks now. Could be some good bargains later when the dust settles. Quite happy to pat my yellow metal now and sell later to buy up banks/property later down the track at better value.

  26. 100,000 put on PMGOLD today at 16.65. Dodgy times ahead. Banks /property ETC have a bad time coming, if not already.

  27. Same ,no trades. The market can go up, down and sideways. This is a sideways market. Maybe i should be writing options ?. (This Demonstration of long term Technical analysis is only relating to the Australian Market) .

  28. Same ,no trades. Though shorting the top 20 Australian stocks is getting close. The 4 big banks are most likely going to be smashed at some stage. Property stocks future looks grim. All major sectors in Australia look average at best. Maybe hard landing coming.

  29. No trades . 100% cash. ($100,000). 0% gain since 17/3/17
    Oh what a painful market, but then again cash is better than Black or Red.(little interest gain)

  30. I have no trades on at this point in time. The resource trade i will not include. I will mention when i exit this trade later.

  31. What i will do to prove my point , is i will start with 100,000 portfolio of cash today(17 /03/17) and paper trade for the next 2 years using technical analysis. The day i trade and exit i will post that same day. I will update at the start of each month with the percentage profit /gain including taking out trade commissions. I don’t trade a lot , and may be in for long periods of time .Maybe anywhere from 4 weeks to 18 months.

    I like sector trading and may use reverse ETF’s and put options at times (shorting). Should be fun.

  32. Hocus Pocus? Definitely! Magic incantations such as “head & shoulders”, “bowl lip”, “cup & handle” & “Fibonacci retrace”. The best that this sort of analysis will tell you is what the herd is doing and what the herd might do next from looking at the trend that they, themselves create by looking at the trend.

  33. By the way i have referred a number of people to your funds ,including a family member. So i am in no way negative on value investing. I realize technical trading is inappropriate for most ,and can lead to great loss. However technical trading can be done well, if you know how to do it. So lets put me to the test and see whether i can be successful or not.

  34. Carol-Ann Berndt

    Totally agree with Roger’s thesis. The comment I would make however is that the technical analysis has such a large following that it creates a kind of self fulfilling prophecy effect that can appear to validate the success of this approach. As an example BHP went way down compared to moving average to $13 so technically it was a buy and obviously a lot of investors bought. I have no expertise whatsoever in technical analysis but from what I have seen it never warns of a precipitous fall usually due to some underlying change in the nature of the business performance. Value investors can never guarantee that this will not happen either but the risk is much lower from my experience.

  35. Phil Nicholson

    Hi Roger, aside from charting witchcraft what do you think of George Soros and his successful speculating/trading? He has returned ~30% pa since the late 1960s. Is it possible he’s just been a lucky speculator given that when you have so many people trying someone will end up tossing a lot of heads in a row? Thanks, Phil.

  36. If i reached 6 trades in two years that would be alot for me . I only do long term trading. 90% of Short term traders lose 90% of there money 90% of the time. I stay away from that. You should never assume all technical analysis traders are all short term traders. I admit most short term traders fail.
    At this point in time i’m soon to be finishing off the resource trade(still in now). I have no other position. I would love to show my hand for the next 2 years and will post my trades with you.

  37. Once upon a time a great investment educator ran a week end course called “Opening Bell” in Sydney. The main thing I took away from this course was to back-test methods of trading and to make amendments to the ‘system’ to get a better result. Charts were a major tool to this end.
    After some pain I learnt that investments should be chosen based on fundamentals and to be patient and wait for that bargain. Not an easy thing to do.
    However “Opening Bell” and charts are not lost on me. I use charts but for TRADING only. Never for investing, and only with a very minor (5%) of my portfolio. Charts work well for me in this regard. Thanks Roger.

  38. My Technical analysis bought me into the resource sector at in feb 2016 and. possibly getting out soon .( (so far up 49%). I also bought NCM at $12.5 and sold at $24. I think it can be helpful?. I challenge you to test me on any sector going forward.

  39. Hi Roger,

    Interesting article – I agree with previous comment that charts may be useful in determining entry/exit points for shares.
    However, I have seen various sites which suggest that a fundamental analysis (factor 1) coupled with a momentum factor (factor 2) provides the best results.
    e.g. magic formula highest rank (sum of ROIC + earnings yield) + 6 month trailing momentum beat most other strategies that used fundamental analysis alone.
    Did your research look at the effects of adding a trailing 6-12 month momentum on the stock performance.
    Would it be difficult to add this and see if it changes your analysis?


  40. I suspect technical analysis worked best when it was not that popular. Back in the 1970s when I invested in individual stocks I found that devoting an amount of time to basic Edwards and Magee technical gave me better results than devoting an equal time to fundamental. I figured this was because back in pre computer days my hand drawn charts were as good as anybodies, whereas my access to up to date fundamental data was always going to be inferior to the professionals. It also seemed that the early (and hence rare) more exotic technical systems made possible by the introduction of computers also outperformed both my manual charts and fundamentals. As the volume of computer based and later still computer generated trades increased, however, the apparent value of technical analysis declined and likely even turned negative. This happened well before the turn of the century, so it is hardly surprising that studies done, and Buffett comments made, in the last 15 years will support fundamental analysis.

  41. Whilst your basic argument is sound I do consult charts for entry points to a stock ( and exit points ). If leaving an order in the market a couple of points lower, at what I perceive to be a gettable price, based on support and resistance levels, shown to me by charts, is not acceptable to your thesis, I will, nevertheless persist in doing such. Using charts in this way has over the years proven its worth to me. An extra percentage point is profit I want and if it is attainable I will try to get it. Charts are very useful for recognising whether a stock is subject to erratic swings or is more likely to trade within a narrow price band.
    I am reminded by the warring factions in the Psychology Dept. between the Nature and the Nurture proponents during my long distant university days. Life’s experience has shown me the importance of both to human and animal behavioural development. I spend a lot of time with horses cattle and dogs and this fact is driven home to me daily.
    Whilst there are some crazy elements attached to most charting programmes, which I totally ignore, having such a programme is invaluable to me.
    Kept simple charts give this value investor an edge that he is not about to relinquish.

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