Why This Blog: Intro to Technical Analysis and Austrian Economics

The financial markets are a difficult place, with experts holding conflicting opinions on just about everything. Combating information overload is crucial. Also important is developing a personal philosophy to help absorb useful information, while rejecting what is useless.

I have a few reasons for putting together this blog. First, I've been through the process of confusion and frustration many new traders and investors experience when learning about the financial markets. I've also come to the point where I now know how to separate what is useful and filter out what is simply a sales pitch from Wall Street, or hype from Washington. How do I do it? Technical Analysis, with good doses of contrary theory, and an understanding of Austrian Economics.

Second, technical analysis does not get the respect it deserves. Too much that is writen about technical methods are either too critical, or not critical enough. When I first began my study of the financial markets, I was skeptical of the value of technical analysis. Yet, after significant study, in real time, I became more confident in the method. It kept me out of the market in 2000, and got me back in in 2002 and 2003. I'm getting indications that we are at another major turning point. I suspect technical traders will more easily adapt to the challenging market conditions, while buy and hold "investors" will become more and more frustrated, to say the least.

On the surface, technial analysis appears easy--too easy. It doesn't take a genius to look at a chart, crunch some numbers, compare some indicators, and come to a superficial conclusion. Unfortunately, that superficial opinion is likely to be mistaken. As technician Joe Granville once said: "If it is obvious, it is obviously wrong."

The value of technical analysis, like most methods of market analysis, is hotly disputed. For some, it is worthless. As Jim Rogers, a former partner of George Soros, says in Market Wizards: "I've never met a rich technician." Another trader, such as Marty Schwartz, say in the same book: "I've used fundamentals for nine years, and got rich as a technician."

The major value of technical analysis is that it is a pictoral representation of market behavior. Technicians and finance professors agree: the market price discounts known fundmentals. The real question is how accurately. The professors believe the market is nearly perfect. Any errors (inefficiencies) are so small, that there is no profit potential in trying to take advantage of them.

Technicians believe that there are time lags before fundamentals are fully reflected in the price. Even when they are, the very price rise may attract other speculators, pushing the price well above the theoretical "intrinsic value."

There is more to this than meets the eye, though. If price incorporates investor expectations of future fundamentals, tracking price changes over time, the speed of those changes, as well as the volume during price moves, would provide insight into what direction market expectations have changed. The key point of technical analysis is to anticipate changes in investor expectations. But to anticipate those expectations, you have to know what they were in the first place.

The biggest mistake budding technicians and researchers make is interpreting technical signals mechanically. They assume all breakouts above a high on above average volume are bullish, while breakdowns are bearish. They use linear tools to study nonlinear processes, and neglect that the only point to technical analysis is to measure the supply and demand, and what those changes suggest for the future.

Any market exchange requires that two participants in a trade disagree on value, but agree on price. The essence of the market is disagreement. Without two people who disagree on value, no trade is possible.

The very nature of market exchange makes the search for truths about the market much different than the search for truths about the material world. Indeed, should a viewpoint about the market become widely accepted, those who base decisions on it are likely to be wrong when it pays to be right.

Third, I see that the odds of a serious economic crisis in the forseeable future is very high. There will be lots of finger pointing, but the analysis you will get from Bloomberg, CNBC, or any of the major networks will most likely miss the point.

There will only be one culprit for the future economic crisis, and the causes started years ago. Government intervention into the market economy coupled with a global, inflationary fiat monetary system, eventually and inevitably leads to instability.

The United States has been on the installment plan toward socialism since the creation of the Federal Reserve in 1913. We had an advanage over Europe, in that the U.S. got started on this dead end much later than they did. Our central bank, conspiring with other central banks since the early 1970's, has posponed the adjustment. Since the 1980's, there has been a boom, but I fear that the boom, caused only by credit expansion, is nearing an end. This will force the U.S. to make tough choices it has postponed for decades.

My approach is to incorporate technical analysis with the logical/deductive method of Austrian economics, a vastly underrated approach for thinking about economic issues. It is thoroughly contrarian in nature, and some of my conclusions will be at odds with generally accepted economic thinking--with its emphasis on empirical techniques, mathematics, and statistics.

I don't mind being a contrarian, because, as Humphrey B. Neill says: "When everyone thinks alike, everyone is likely to be wrong." Being a contrarian at turing points is where the money is made.