Technical Analysis Is About Psychology

 | Nov 18, 2016 | 12:30 PM EST
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drys

I'm a fan of technical analysis. Not as a stand-alone at all times or for all occasions, but I've been known to make trades based on chart action. I generally see technical analysis (TA) as the mathematics of psychology. It's a view into the psyche of the strongest-willed traders at that specific time/moment. It's interpretation, and not every interpretation is perfect. At times, it can be downright wrong. 

Think of TA in terms of Twitter (TWTR) and its infamous 140-character-limit tweets. Assuming you use the service, have you ever posted a tweet and immediately received backlash from someone who inferred you meant one thing when you really meant another? It could even be as simple as something you tweeted sarcastically, but they interpreted it as serious. I see it every day. Even if you aren't tweeting, if you've read tweets, no doubt you've come across one that has made your blood boil. Heck, it's an election year, you probably read one an hour. 

In some cases, the anger may have been justified, but I'm betting there was at least one instance when a second or clarifying tweet hit the screen and you thought to yourself, "Dang, I really overreacted for nothing." So there are times when even the best will interpret TA -- whether it be price action, volume, Fibonacci levels, momentum, trend, etc. -- incorrectly. 

There are times, though, when TA isn't about misinterpretation, but about the trash. Case in point: DryShips (DRYS) . Throw any short-term and long-term TA in the trash. If one were to look at a monthly chart or even a weekly chart going back to the beginning of 2015, it doesn't take a genius to see what I'm talking about. With all the dilution and reverse splits, even the recent crazy price action isn't a blip on the radar. The best thing you can do with the chart is print it out and make it into a paper airplane. Even those trying to draw some conclusion from the action over the last two weeks are staring at nothing more than an emotional dumpster heap of momentum traders and greater foolists, those hoping to find someone willing to pay a higher price for no other reason than they believe they can sell it to an even greater fool at an even higher price. 

There is interpretation and application. There is misinterpretation and application. And then there is foolishness and gambling. Recognize when it is time to step away from even your most preferred approach to decision-making.

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