Sunday, July 22, 2007

World's worst trendline nominee

As a scientist I am drawn to technical analysis. I guess it is the joy of recognizing patterns in nature that seems to always push me to study charts and strive to find order in all of that chaos. The reality is, unfortunately, there are very few "real" patterns out there and sometimes it seems that technical analysis is more about helping an individual trader feel more comfortable about his or her thesis than actually predicting future prices. The chart below is a perfect example. That has to be the lamest and most arbitrary trendline that I've ever seen. I can easily draw 4 or 5 more trendlines on the same chart. Who is to judge what is right and what is wrong? Absolutely nobody. If the trendline is worthless, what good is the breakout? Trendlines like the one shown below are the type that give technical analysis a bad name.

There are methods, however, that I find to have incredible predictive power. Take Tom O'Brien's method for instance. He recently went long Agnico-Eagle Mines (AEM) around 34.50. He effectively bought the bottom using only price and volume to estimate the supply and demand, all in the face of an extremely bearish market outlook. He also has picked up several other gold stocks just before they shot up.

My point is that you can never just listen to anyone with a newsletter out there, like the guy who published that lame trendline. Make sure you follow someone who stays disciplined in the face mixed signals and, most of all, has proven themselves time and time again.

No comments: