Technical Analysis vs. Random Walking

Who says books about investing are boring? (queue the theme from Rocky)

In A Random Walk Down Wall Street, Princeton University professor of economics Burton G. Malkiel attacks technical analysis and, specifically, John Magee, co-author of Technical Analysis of Stock Trends. How does the technical analyst respond?

A Random Walk Down Wall Street

Freaks, Religious Fanatics, Vampires, and Sexual Deviants

Malkiel (obviously excluding himself): “Academicians…keep themselves busy by preparing papers demolishing other people’s theories, defending their own work, or constructing elaborate embellishments to generally accepted ideas.” Malkiel spends a great deal of time doing just that: trying to build a case against technical analysis by comparing its practioners to freaks, religious fanatics, vampires, and sexual deviants:

  • Technical analysis is a ” search for the golden egg” that “has spawned a variety of methods ranging from the scientific to the occult.”
  • “Technical analysis is…a cult”
  • “As Magee wrote in the bible of charting, Technical Analysis of Stock Trends…” (after which he creates his own “castle in the air” scenario without ANY real life examples to support it)
  • “With the glee of Count Dracula surveying one of his victims, the chartists…”
  • On chartists sexual habits: “Indeed, the psychiatrist Don D. Jackson, author with Albert Haas, Jr., of ‘Bulls, Bears and Dr. Freud’, suggested that such an individual may be playing a game with overt sexual overtones. And all this takes place under the pennant of that great symbol of sexuality: the bull.”
  • “Chartists were often viewed as peculiar men, with green eye-shades and carbon on their fingers, who were tucked away in a small closet at the back of the office.”
Technical Analysis of Stock Trends

Do you really believe that these patterns are random?

After being confronted by “the random walker” that there is no predictable behavior on Wall Street, Magee said: “You fellows rely too heavily on your computers. The best computer ever designed is still the human brain. Theoreticians try to simulate stock market behavior, and failing to do so with any degree of predictability, declare that a journey through the stock market is a random walk. Isn’t it equally possible that the programs simply aren’t sensitive enough or the computers strong enough, to successfully simulate the thought process of the human brain?” He then showed achart to the random walker. There it was – spike up, heavy volume; consolidation, light volume; spike up again, heavy volume. A third time. A fourth time. A beautifully symmetric chart, moving ahead in a well-defined trend channel, volume moving with price. “Do you really believe that these patterns are random?”

Photo by douglemoine

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