A popular “Technical Analyst” ‘round these parts once had occasion to post a kind of...let’s call it a “thesis,” purporting to explain how and why technical analysis “works.” (Get used to all these scare quotes, they just keep a’comin’!)
The post, titled "Essay: Is Technical Analysis a Quantum Event?" was made about three months ago, but I hadn’t had the pleasure of reading this gem until just now.
And now I get it.
The whole thing is just a big practical joke. It’s satire.
It has to be...right?
There can’t possibly be a real, serious person, sincerely believing in this woo as the foundation upon which all the rest of his investment advice is based.
It’s Andy Kaufman’s final prank.
Actually, that’s really giving it too much credit.
Let’s fix that:
It’s Bob Zmuda’s final prank.
But on the off chance that somehow, in one of the infinitely many-worlds of the multiverse (take note Mr. Analyst—that is how you name-drop a quantum mechanics concept without resort to pseudo-scientific gibberish) this guy sincerely believes in the junk-science flotsam and jetsam that he’s tossing out, I thought it couldn’t hurt to explain how practically every single thing he claims to believe about technical analysis, economics, physics, and science generally, is wrong.
And not just wrong.
So wrong that even the chemtrail guys are like, “Wtf? This guy’s nuts.”
So I’m going to proceed line-by-torturous-line, in order to show why this dude’s ideas are no more legitimate than concepts like phrenology, Time-Cube, or shape-shifting lizard people.
(Actually, the lizard people are real. Who else could have replaced the American Constitution with the UCC so that the NWO ZOG Deep State could melt the towers with nitranium-blarpopharsmate as a false flag attack leading to the installation of a CIA Monsanto Mosque at Ground Zero doubling as an underground FEMA camp producing liquid autism distributable as Gardasil?)
I don’t feel the need to name names because we can just let the ideas speak for themselves.
The original author’s ideas are quoted and bolded, following the abbreviation “TA” for “Technical Analyst,” since that is what he fancies himself and I am every bit the gentleman when it comes to titles.
My very gentle and loving critiques will appear underneath in plain text.
So let’s get started with the “fun,” shall we?
TA: “I'd like to share my understanding of how and why Technical Analysis works.”
ILTY: You shouldn’t have. And it doesn’t. But let’s hear what kind of logorrhea you can spew on the subject!
TA: “It's a comingled effect of my training as a scientist, business executive and musician.”
ILTY: Wonderful. My response is based upon my training as a tuba player, a chimney sweep, and an olde-timey barber with the gossip and the leeches.
TA: “So, yes, it's a perspective through my set of unique lenses...”
ILTY: “Unique lenses,” is one way of putting it. I say a lot of things when I’m drunk too.
TA: “...and just perhaps, our lenses could have some "phasic" overlaps.”
ILTY: I sure hope not, or else I have to make sure to up my clozapine dosages.
TA: “The basic tenet of Technical Analysis is that sentiment drives all price actions. Simply put, price is a reflection of sentiment.”
ILTY: Whoah. Hold up. You can’t just say two different things one right after the other, as if they are complimentary. Especially if they are both wrong. Let’s parse this out.
First, what is “price?” You want to say that it is (simply!) “a reflection of sentiment.”
Well, it would help if we clarified what kind of “price” you are talking about. Market price? Market Clearing price? Equilibrium price? Transaction price? Bid price? Ask price? Bride-price? (Are you getting married!? Mazel Tov!)
You see, economic analysis requires a very precise defining of terms. You can’t be throwing out concepts like “price” without explaining which kind of price, exactly, you’re talking about.
But I’m going to go ahead and assume that the price you’re wanting to talk about is “market price,” since your little scribbles and multi-colored triangles are seemingly intended to symbolize some final average quantity of money at which an asset is being offered and at which it is being generally accepted at any given moment of time in a particular exchange, market, set of markets.
I’m making that assumption based on the fact that your calls and charts appear to use the price figures actually put out there by various exchanges and market-makers, and don’t appear to delve into the underlying raw data from which those prices are determined (i.e. separate bid prices and ask prices over time). Nor do your charts seem to be speaking about some theoretical and/or perfect world where prices exist in a frictionless economy.
So as best I can tell, it’s “market price” you’re ultimately talking about.
Which means your “sentiment” theory is a very, very small piece of a min larger puzzle. The market price of any good or service does include sentiment—but not just sentiment.
Market prices are generally understood as being determined through the interaction between supply and demand.
The “demand side” is where I think the main part of the “sentiment” you are talking about comes in. The sentiment you seem want to describe as a reflection of “price,” is the sentiment of investors. Chartist types sometimes like to call this “investor sentiment,” which is, generally, a demand-side concept.
Investors are the ones buying (a/k/a “demanding in an economic sense”) the assets. Therefore, investor sentiment can be described in the normal ways that we’re all familiar with: “Bullish, Bearish, Irrationally Exuberant, etc...
Great! We have the demand side factored in.
What about the supply side?
Well...it really doesn’t. Not in the same sense as on the demand side. This is why economists don’t typically talk about “marginal utility” with relation to the supply curve.
“Marginal Utility,” is the fancy economics term for the change in satisfaction or subjectively understood benefit from an increase in the consumption of a thing. (If you are starving and haven’t eaten steak in a while, you’ll pay a lot of money for a big steak. If you’ve already eaten five big steaks, you’ll (maybe) pay a tiny bit of money for a big steak.)
The important thing to understand is that economists don’t talk about marginal utility with relation to the supply curve, because marginal utility is all about “consumption,” and consumption is something that “demanders-as-demanders” do, not something that “suppliers-as-suppliers” do.
“All of that,” he can say “is factored into the market price that I am working with on the charts. So the numbers I’m working with includes all of that demand side and supply side sentiment. That’s exactly what I mean when I say that price is a reflection of sentiment.”
Great! That works, as long as you set aside all of the other things that come in to play with in the realm of supply and demand beyond sentiments.
Let’s go back to the supply side of things, since we are trying to understand price as the interaction between supply and demand.
Suppliers, which we typically know as businesses, companies, or other producers of goods, services, assets, or even currencies, are just organizations made up of groups of human beings. So as we discussed, we could, conceptually, chalk everything suppliers to up to a kind of sentiment.
But is this the kind of sentiment that our technical analyst means when he says that all prices or reflection of sentiment?
I highly doubt it.
So what is it that drives the decision making and actions of firms when they are doing things on the supply-side?
There are entire text-books and treatises that explain the all of the relevant variables and factors that are understood to go into firm decision making on the supply-side. There’s even an entire school of economic thought that purports to focus in on “supply-side economics.
So we can just discuss a few paradigmatic examples here: The price of inputs such as materials and the costs of the factors of production, such as labor.
If a company makes pencils and the price of wood rises exponentially, one of the actions that company is likely to take is to decrease the supply of pencils being produced in order to maintain a certain level of profit.
Or if there is a war in a region where a company produces the majority of its goods, tying up and decreasing the supply of useful labor, it is likely that the company will reduce the supply of its product as a result of its reduced access to the necessary factor of production that we call “labor” needed to make its product.
Could we say that these changes in the supply were ultimately driven by the sentiment of the decision-makers at the company, with that sentiment being expressed as “a desire to maintain profits, and therefore, decrease the supply produced when the price of inputs or the cost of factors of production increase?“
Yes, we could conceptualize it this way.
But it’s unhelpful and, to be frank, kind of silly to conceptualize the situation that way, for two reasons.
First, it’s unhelpful because the whole entire point of attempting to make models and conceptualize all of the innumerable processes and actions that go into the human interactions that we style “the market” is to provide us with an ability to better understand how and why various situations come to exist.
We conceptualize thoughts, actions, and events at a level of abstraction that is useful to answer the specific questions on which we are focused.
For example, assume you are asked to formulate an analysis explaining why I.L.T. Yodith writes long winded rants. What you do and don’t include as part of your analysis--and ultimately your answer--will depend on the purpose for which you were asked to formulate the analysis in the first place.
If you are being asked to do this in order to get a better insight into my general decision-making process, you would include a lot of information about my psychological, mental, and emotional states. You might find out that at the time I wrote this post, my blood sugar was really low. From this you could conclude with the hypothesis that “I.L.T. Yodith writes long-winded rants because his blood sugar gets too low.”
Great analysis. It gives you something to work with in the future when you’re trying to figure out my decision-making processes.
But you also could have explored deeper into the root causes of my blood sugar being low. You could discover that my blood sugar is low because he couldn’t get lunch as a result of the restaurant in the building was closed because of dangerous weather-related road conditions.
This means that at a different level of abstraction, you could conclude that, ultimately, “I.L.T. Yodith writes long-winded rants because of dangerous weather-related road conditions.
You could go to an even different level of abstraction and discuss how all human actions are really explainable at a quantum-level, with observation causing wave-functions to collapse to a single eigenstate, all combining to bring about existence and the state of things as we know it.
In that sense, at that level of abstraction, you could conclude, ultimately that “I.L.T. Yodith writes long-winded rants because an infinitude of observations cause a particular sequence of countless wave-functions to collapse such that a portion of these collapsed wave-functions make-up a thing called ‘I.L.T. Yodith’ that does a thing we call ‘writing long-winded rants.’”
All of those conclusions are, factually, correct.
But are they all useful for the purposes at hand?
Of course not. The person asking you to write the analysis doesn’t care about weather-conditions or restaurant closings or wave-functions, because none of that helps that person answer their original goal of obtaining a better understanding of my decision-making processes.
In other words, it’s always possible to conceptualize or model the world at some higher or lower level of abstraction than the one which is most useful for one’s chosen purposes. But it’s pointless.
Thus, it’s obviously possible to conceptualize supply-side decision-making as ultimately being based on the sentiment of the guy who wrote the company supply-chain policy ten years ago...or the sentiments of the company decision-makers who can be considered to be “deciding” at every single moment to continue following those same policies that had been put into place years ago...or that every decision can be traced back with an endless series of “Why” questions until the final answer is “Because they felt like it.”
But are those conceptualizations helpful in the economic model of explaining how supply-side decisions are made?
No. Not at all.
Not only are they not helpful, but they're hurtful to achieving our original goals, insofar as they force us into a deeper level of abstraction regarding human psychology from which we can’t possibly ever obtain enough information within our limited lifespans to form any kind of useful conclusion. (Just like you could--theoretically--explain why I wrote this article at a level of abstraction exploring quantum mechanics, but you’ll never be able to piece together all of that kind of information necessary to build up into a useful explanation of why I write long-winded rants).
“That’s all well and good, I.L.T.” you might say, “but does it all really have to be that complicated. You seem to be taking something simple and making it more complex, just for the fun of it.”
So if you’re not satisfied with that answer, how about a second, simpler reason why you don’t want to explain supply-side decisions as being based on “sentiment”:
We have no real idea whether a company’s decisions (such as they are) were based on any underlying “sentiment” in the normal sense of the term, or if the company’s decision makers were following a predetermined supply schedule or some internal policy regarding pricing structure and profit margins that was formulated at some unspecified time in the past based upon some combination of sentiment, reason, and rationality.
In other words, not everything is an emotion driven decision based on sentiment. There’s likely a place for reason and rationality.
We can avoid the long-standing and ongoing debate between the greatest thinkers of each generation as to the primacy and fundamentality of human sentiment versus human reason. Anyone claiming to have a definitive insight as to the true and correct resolution of this debate is, to put it mildly, full of it. To this day the greatest minds still disagree with regards to the quality and quantity of interaction between reason and sentiment in human psychology, decision-making, and action.
It suffices to say that any theory claiming to have legitimacy and scientific rigor, will take into consideration the fact that all human thinking and all human action is likely affected by some combination, proportions unknown, of sentiment and reason.
Thus, when it comes to supplier’s decisions and actions regarding the supply of a good, service, asset, or currency at any given moment, sentiment is but one single part of a much larger and more complicated equation.
And since we are talking about human beings making decisions and taking action on the demand-side as well, the very same issue of human reason and rationality as sentiment co-determinant of demand exists as well.
All of this means that supply and demand are both determined by a combination of factors, including sentiment, but also including human reason, rationality, various informational inputs, and various empirical facts about the world, including but not necessarily limited to changes in the quality, quantity, price, or cost of various factors of production (like raw materials and labor as explained above).
And because market price is an expression of the interaction between supply and demand, we can therefore say market price is an expression— or, if you’d like, a “reflection”—of the interactions of the totality of human decision making and action with regards to a specific asset, based upon all of the variables outlined above, of which sentiment but one single part of a much larger whole.
This description of price is not as pretty or pithy as “price is a reflection of sentiment.“
(Although it should be pointed out that Ludwig Von Mises of the Austrian School of Economics did figure out a way to boil all of the above-analysis down into a fairly pretty and fairly accurate description: “What is called price is always a relationship within an integrated system which is the composite effect of human relations.” Notice that this does not attempt to limit human relations to “sentiments” but, rather, properly speaks only of “human relations,” in their entirety, necessarily including the full panoply of human interactions and the psychological processes occur within them.)
And, compared to the remainder of our Technical Analyst’s essay, this statement is actually not egregiously ridiculous. It appears to show a partial understanding of how market prices work.
But it’s extremely important to point out that if this is the foundation upon which an entire theory of technical analysis is based, then even if the remainder of the theory were logically sound and coherent, the theory would be wrong, because the idea at its very foundation is wrong.
Though, as we will see, in this case, the remainder of the theory is not logically sound.
Unfortunately for all the people who have chosen to follow the predictions of this “technical analyst”, the theory underlying those very same predictions charges over the line from “misunderstanding“ into “nonsensical“ and never turns back.
I’m declining any payout on this post and all of its parts in the future, because, honestly, nobody should profit off of this guy’s ideas, even by debunking them. It’s an honor to point out the nonsense-on-stilts being paraded around as “analysis” here. If only I could ensure that he finds this and flags it so it gets even more attention.
I’m begging you, guy, make me a happy man and downvote this to Hades!
More to come...
Addendum: You may be thinking, "Why up-vote a post that has %0.00 probability of earning me any curation rewards whatsoever. What a waste."
I'll tell you why you should up-vote this. Because it helps people.
It gets me nothing. I don't want any money from it. In fact, I'll probably end up losing money from it.
And I don't get any personal satisfaction from making someone else look ridiculous. I don't have any personal gripes with the guy I'm criticizing. In fact, I'm hoping that he can figure out a way to make even more money than he makes right now, just without all the "tricking people into following fundamentally flawed gibberish advice based on nonsense and blather."
A lot of people on this platform like to focus on the unfairness of this guy getting a lot of money. That's not my gripe. I really don't care about all that. I don't begrudge people their money.
What I do care about is vulnerable people being guided, even if only gently, into making investment decisions based on pure bunkum & balderdash dressed up with economics and science jargon to lend it a false air of respectability.
If this helps even one person make the decision to better educate themselves about their own financial decisions, and guides them away from pseudo-scientific, pseudo-academic nonsense, isn't it worth the up-vote?
And if someone has this information readily available to them, alongside the guy's original essay, and then still chooses to follow his calls and predictions? Well, hey, caveat emptor. At least this gave them a fair chance.