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The Investment Trilogy


Fundamental, technical analyses are useless without money management.

Dear Professor Sadana,

Thank you for both buzzing and then posting the answer to my question. Always a thrill and an ego boost to see my question in print. May I expand?

While I understand that technical analysis is really the art of looking at the mind of the investing masses in graph/chart form, and thus anything that happens in the market is part of that mind/graph/chart, how can we apply any real significance to technical moves when those moves were gamed by government intervention?

For example, when looking back at the tape a month from now with the market dropping, we might look at the chart and say that this 500 Dow point move up on March 23, 2009 was obviously a show of confidence in the market, and thus should be viewed as support.

But that support was only there because of massive intervention by an outside force that might not be there the next time we visit that level. Don't all these artificial and deliberate interventions distort your technical analysis and actually increase the risk you're trying to mitigate by using technical analysis?

Hop do you compensate for this? Or is it even necessary at this point?

Minyan Michael

Dear Minyan Michael,

First of all I wanted to thank you for your excellent query. The question you've asked is often on the minds of many, and yet asked by few.

For decades, investors and traders have tended to belong to either the "fundamental analysis" camp or the "technical analysis camp." The fundamentalists view technical analysis as voodoo and are generally dismissive of technical assessments. After all, how can charts tell the future? How can the future be an extrapolation of the past? At best, they believe that certain short-term action can be explained by too many technical analysts watching the same levels on a chart, as you've highlighted.

The technical analysts, on the other hand, believe that all fundamental facts have been endlessly researched and are discounted in the price. They believe that price and volume patterns can offer valuable clues about the future direction of a stock. They highlight that stocks typically discount the future, so if you want fundamentals to change, you would typically miss a large percentage of the move (for example, it's widely known that stocks tend to bottom approximately 6 months before the end of a bear recession).
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