Tuesday, March 01, 2005

Fundamentals Versus Technicals Argument

Recently there has begun a, fundamentals are better than technicals and vice versa, argument floating around the financial world. This was all started from the recent firing of Louise Yamada and the entire technicals team at Smith Barney. I believe Ron Sen, over at Technically Speaking, has a great observation about the entire ordeal. It seems that Ms. Yamada might have been a little too bearish for good 'ol Smith Barney. They need to sell the bullish argument remember.

Anyway, one of the worst arguments I have seen against technical analysis is this, "Technical analysis only works because everyone believes that it works." This argument makes zero sense to me. Let's take an upside breakout out of an asymetrical triangle of XYZ as an example.

XYZ is currently in an asymetrical triangle pattern. Seventy percent of market technicians have recognized this and are salivating for a breakout. The breakout finally occurs. Those seventy percent of market technicians get in. Now if the argument above against TA is correct, then the stock would just collapse. All of the TA's that recognized the breakout have bought their shares. If TA only works because everyone believes that it works, then the next move for XYZ shares would be down. This is not the case most of the time.

Someone has to keep pushing XYZ stock upwards after the breakout. The TA's are already in, so they are not doing it.

I believe that this argument is idiotic, unless I'm completely missing something, which is very possible.

Best Regards,

The Soothsayer of Omaha

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