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Delusions, Illusions And Technical Analysis

We are at the point of debating centralization versus decentralization with bitcoin and blockchain at center stage. Despite that there is a lot of delusional analysis about the markets that is free or even on subscription basis.

There is a large group of market analysts that were taught to think about markets in terms of words rather than mathematics. Words such as “trendline”, “breakout”, “head and shoulders”, “triangle”, “price projection”, etc., lead to illusions and delusions about markets and price action. As I have written in several articles before, this approach to technical analysis has failed and in the process it has facilitated one of the largest wealth redistribution in recent history from naive traders to market professionals.

A follower in Twitter sent me a chart yesterday that looked similar to the one below:

I have no idea who produced the above analysis. The chart above reveals that someone used quarterly log prices to “project” S&P 500 to 3463 based on a “breakout” pattern that lasted about 13 years.

Now, as far as I am concerned, S&P 500 can reach 3,000, 4,000 or even 10,000 in X number of years, or even fall hard. The point is that this one formation on a log quarterly chart is not serious basis of any forecast, prediction or anticipation. It only reflects the delusional state of technical analysis based on drawing lines and mixing them with words that attempt to compress very complex processes down to a few well-defined patterns, a process also known as lossy compression in encryption and forecasting.

More interesting is the fact that some use this delusional type of analysis to sell subscription services. I would feel embarrassed selling geometric illusions to an audience and profiting from that activity. I have a weekly subscription service where I try to offer some unique quantitative prospective about market price action; no line drawing and no naive patterns such as head and shoulders and triangles in my weekly reports. The emphasis is on machine learning, mean-reversion and on results from a few unique indicators. I offer the service as long as I receive positive comments from my subscribers. The fees collected go towards maintaining my blog and paying for its expenses.

But I would never try to sell lines drawn on charts and some naive patterns or even simple indicators without at least some historical analysis, even on a small sample, that’s fine. Drawing a projection on a quarterly chart because of some breakout raises serious questions. This probably goes beyond illusion and delusion. It is also so common that people have accepted this as normal. Well, this should be the subject of a PhD in psychology, not of a blog article.

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If you have any questions or comments, happy to connect on Twitter: @mikeharrisNY

Charting and backtesting program: Amibroker


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