Welcome to my blog about Financial Analysis.
I'm writing about Technical Analysis and the stock market. I write mostly to get clarity, and to ramble about topics that I'm interested in - like Technical Analysis, Fundamental Analysis and Business Cycle Analysis or whatever catches my interest. It's not like I have a definite solution to anything, but perhaps a "perspective". Like dear Maya Angelou says, "A bird doesn't sing because it has an answer, it sings because it has a song".
6. December 2019
Why are we analysing the market?
I have come to ponder "Why do we analyse the markets, and why do I enjoy it so much?". Especially the word "joy" is important. Humans are not meant to work just to pay the rent. We are meant to work with something that intrigue us, something that is a challenge and a joy at the same time, something we can lose ourselves in. For some reason all of that is summed up in analysis, for me.
I knew a very gifted clarinet musician that worked with discipline with the music, and he loved it the same way. For someone else it is working with children - which in my view is something of the highest and most worthy aspiration. I just don't think we "choose" what we are fascinated by. It just happens. We also don't choose who we fall in love with. It just happens some magical way. But we are not here to talk about marriage, music or children - although we should do that some other time. The topic is working with analysis.
I am fascinated by craftsmen. I watch Japanese carpenters make incredible workmanship with wood and their tools. I watch David Bull make woodblock printing which is part craft knowledge and part art. And whenever I watch this, I recognize their commitment and craft in my own work. I am just as dedicated and disciplined, and analysis is also partly a craft knowledge and part "art" (call it symmetry, gut feeling, alignment, sensing or whatever term you like).
My tool is not a chisel or a Japanese Hangi-to. I would love if "my craft" used this kind of tangible chisel tools as well as thick cherry wood to cut. Alas, my craft is without tangible tools. I use a computer, a mouse and a keyboard - and my eyes and wit. But in the computer I use virtual tools like trendlines, mathematical equations overlaid on the price chart etc. So, I have my arrangement of tools as well, although they are less tangible than a physical chisel. That way I feel connected to the old craftsmen that worked all their life making useful craft, and developing their skills along the way. Knowing that there is always more to learn from the craft, more to pour into the craft. This is a two-way pump, working both ways, and that's the way it has always been if done right. You learn from doing the craft, and what you learn you pour into your next project.
So I analyse the market because I'm a craftsman, and I can't help it because that is what is creating joy and development. I know this is centring on me, so the question should also be what others get out of it. It is like a craftsman that I met in Canada. I liked him right away, and he sold me a beautiful wooden cutting board for the kitchen. The board had cherry, maple and oak wood fused together into a beautiful cutting board. That is his craft and joy. And I get to cut vegetables on this beautiful cutting board, enjoying the marvellous work and details, remembering him and his craft. The same way someone else should get something out of the craft I do. You may like this particular cutting board, or you may prefer to buy it elsewhere because you prefer plastic cutting boards. There is no judgement in that. Plastic boards are fine. But here you get wooden cutting boards made from maple and in my design, and there is always a select group of people who appreciate that kind of craft.
21. January 2019
DAX bear market or not - aim for 2019
It has been a while since we’ve looked at the biggest stock index of Europe, the DAX. The question we will tackle today is whether the DAX is in a bear market, and what to expect in 2019.
It’s quite infrequent that I post anything about the DAX or the day-to-day stock market. I could do that, but I want my blog to be 80% about the science, the methods and the tools, and max. 20% on actually forecasting. In my day job I have plenty of real-life forecasting, and I don’t want the blog to become just a free forecasting service. But I’m thinking: Those that are brave enough to come and read my blog (the very few, brave people) they should at least get “some” bonus in the form of actual forecast. So today I will try to forecast the DAX.
Before you read my forecast for 2019 you may want to see my previous DAX forecast. I did that in 2017 (trying at least once a year to give an outlook). At least my previous forecast gives a real track record of how the forecast went. In fact, the forecast was so nice and spot on that I’m a bit cringy about mentioning it. But anyway, I guess only one person out of a thousand will go back and check, and in that case the link is here:
DAX in a bear market?
I have seen so many articles discussing “Is the DAX in a bear market?”. None of these debates make sense to me. The term “bear market” is totally arbitrary set as 20% decline (a “correction” is set as 10%) and these percentages doesn’t make sense to me. These two percentages are really not a measurement of anything. Instead I use the term “Downtrend”. Is the DAX in a long term downtrend - meaning a decline that typically last 1-3 years? That is a far better description. And yes, the DAX gave the signal of a (bear market) long term downtrend in April 2018. That is 9 months ago. So why do people still talk about it today as if it is an open question? It’s done, and we got the signal 9 months ago.
Let me clarify the signal I just mentioned. The graph on the right shows the monthly price with moving average, MACD, RSI etc. The same type of setup I had in my above mentioned forecast from 2017. There are two parts to a downtrend: First a break below the long moving average, and then later a break below the MACD red line (just below the price graph). The last and final signal of the MACD came in April 2018. Since that point there was no ambiguity of the direction, and no “bear market discussion”. My point is just this: Once you use technical analysis in this way, there is no need to waste time on meaningless questions and ambiguity. You have a signal.
How long is the downtrend going to last?
Now this is a much better question. How long is the downtrend going to last? A MACD signal of a downtrend means “1-3 years of decline, but a minimum of 1 year”. This is very often 2-3+ years for commodities, and normally a shorter time period for stocks, perhaps 1 year or a bit more. So when was the DAX peak? Mid January 2018 - exactly 1 year ago. Happy birthday! Light the candle on the cake.
As mentioned, the minimum requirement of a MACD signal is that the DAX should fall one year. So the DAX has just fulfilled that promise here in January 2019. We don’t exclude that the downtrend can last 2 years, or even 3 years, but we just know that we are dealing with a minimum of 1 year, and that is now done. Think what the general stock owner could have saved, if this MACD signal and outlook were commonly known.
What is going to happen in 2019?
Now this third question is much better - and much harder to answer: What is going to happen to the DAX in 2019? This is where we start to forecast. This is so much more interesting than “DAX in bear market?”.
Let’s look at what the technical signal says. The RSI is hitting the 20 mark recently (in the monthly graph). It took a year for the RSI to work its way from above 80 to 20. And the concept of 20 means that the DAX is currently in the last phase of the downtrend. The idea is that the DAX is in the final perhaps 10% of the overall decline. But the RSI doesn’t do more precise timing than that (then you need other tools). So the low point can either be right now at 20 (so the DAX will start to increase right now) or we will see a divergence (a little bit lower DAX in the coming months, where the RSI start to increase as a divergence signal).
The black trendline in the monthly graph could be a possible low point/turning point. The DAX doesn’t have to hit it completely, but is represent a good idea of a support zone that we don’t expect to be broken (not yet, but later). I didn’t draw any fibonacci, which would be a good idea, but I’m trying to not do too many technical tools.
Another thing to notice is that the RSI is making a “hidden divergence”. The RSI is lower than a previous low, but the DAX is not. This implies an underlying upward pressure starting to build.
Conclusion for the monthly graph: The indicators show that most likely the majority of the decline from January 2018 is done, and the DAX has only roughly 0-10% more decline ahead.
The 2nd graph (weekly graph) shows that the DAX has just crossed above the short moving average. This means an end to the previous short term downtrend. A lesson that we all have to learn again and again is that we don’t “assume” a downtrend is over as long as it is below the moving average. Don’t try to pick a bottom. But with the current break above the moving average I have placed a number “3” at the current low point in January 2019. This comes from Elliott Waves (I have other blog posts about this tool). You can see my Elliott wave count further back in time on the graph. I can’t testify that this is a good count, but it is “my count”. If this count is correct (to be seen), then we have hit a 3 low point, and then we are going to see a 4 (abc) increase in spring 2019, and then a 5th wave that is going even lower, but possibly only mildly lower than today.
Once the 5th wave is done, we could potentially be at an A low, looking for a B increase (followed with a C decline). Now all of this only makes sense if you are an Elliott wave fan, so let me make it easy by showing the two possible outcomes on the 3rd graph.
After seeing the 3rd graph there is no need for further explanations. This gives the idea of what we are looking for (based on 2 scenarios, although there are more scenarios). Don’t take the timing and the targets too literally, it’s just meant as a rough guide. Just be totally clear that this is a “game plan” based on Elliott wave and the typical pattern we expect. A game plan need step-by-step verifications from other tools. And the MACD is important in this aspect. We may likely get a break above the weekly MACD (if the plan is correct), but we don’t necessarily expect a break above the monthly MACD. The meaning of that mumbo-jumbo is that any increase is likely short to medium term, but not the start of a really new long term uptrend (1-3 years).
The most important outcome from the analysis is perhaps this: We cannot expect the “one-sided decline” to continue. We are likely going to see much more up/down movements (both short and medium term upward corrections) than what we saw in 2018. So we cannot go completely short or completely long and forget to monitor the market, but we have to stay more nimble now. In 2018 you could just have gone short and forget about everything for a year. That is likely to change in 2019.
What am I missing in my forecast? Oh, I only miss just about the most important thing that I always stress again and again: We don’t build a forecast from just one model - never! I’m only using technical analysis (and only a fraction of it). I am not using the fundamentals, the macro economics and the cycle analysis. That is a minimum requirement for giving a solid forecast. But this post would then be so much longer. So consider this a partial forecast only, based solely on technical analysis. That is also what I did in my last analysis (you can see how that went with the above link). So now it is up to you to monitor the markets and the signals in 2019.
15. December 2018
"What is your track record" - part 2
Sorry about the long wait. Life has a way of taking you places, and I have been busy with several things…but here is the second part of “Track record”.
I said that I would show you a practical example of my own track record. I learn much more from practical examples than mere theory, so I will show you my track record for Brent oil.
I really don’t want to pick an example where “everything was hit 100%”. That would just be distasteful. And there is also no point in showing an example where I got it totally wrong. So in this Brent oil example you get a mixture. I will show you the good, the bad and the ugly.
If my only concern was to “look good” and be impressive, then I would show this long term forecast for Brent oil - see the graph no 1. This forecast was made in 2014, showing a Target 1 low point to come “late 2015, early 2016 at roughly 40 USD”, and then Target 2 shows an increase to a “Q3 2018 peak at 60-80 USD”.
How would you rate the accuracy of this? The low point came January 2016 at 38 USD, and the peak came in October 2018 at 84 USD. Yes, the peak came 3 days into Q4 and not in Q3, but 3 days is acceptable, right :-) And yes the peak came 4 USD higher than 80 USD, but all in all this is rather accurate - seeing as this is a forecast made in early 2014. Graph no 2 shows the real price movement. All in all practically a “bulls- eye”. Now let’s look at the bad...
Will our forecast for Brent oil continue to be impressive if we look at the medium term forecast? Oh yes - it is not enough to forecast long term price movements for brent. You also need to forecast the medium term movements of 3-6 months trends. So we can now see the track record for that.
Graph 2 shows green arrows (where the forecast was right and on track), and red trend arrows (where it was not on track). You can see that there was a good number of green arrows, but I didn’t quite get all the movements right. The red arrows shows extraordinary straight increase where I thought we could see some zigzag movement instead. I knew that prices would eventually go up, but I just didn’t expect such an unrelenting increase without some zigzags. So the red arrows will diminish my track record.
Now to the ugly part. Yes, exactly - the part that no-one normally shows you. A forecast is fine, but I’m a practical guy. It also needs to be followed up with practical action - i.e hedging oil price (or buying the stock you forecasted). Without action there is no benefit. My recommendations are normally stated as “Initiate” where you definitely have to do something, and “Consider” where I think there’s a good chance, but it is really up to your own judgement and risk tolerance. And when I look back at brent oil I had way too many “Consider” and too few “Initiate”. I simply were not bold enough. So the forecast was really good, but the practical hedging was so-so. True, I did say “consider” and that meant that you could have done something. But in the end I was not impressed with myself.
The important question here is: Should we make a track record of his “Forecast accuracy” or his “Hedging accuracy”? Can you see how I just pile more and more things on top of each other, and every piece is making “track records” more and more difficult. It started out as a quite simple exercise - mathematically clean and easy - and has ended with a chaotic tumble. That is why I don’t like track records.
The downright ugly
Now that we had a look a my track record for brent oil (mostly proud of it, but realizing that it is not perfect) we can take an example of a really ugly one. I don’t want to tell you who the forecasters are and what item they are forecasting. Let’s just say it is really high profile names and everything is public knowledge, and I have the facts for verification. I sometimes use examples like this when I’m doing workshops. I have gathered a great number of such examples.
Graph 3 shows the example of a real life forecast. There is a very interesting story to accompany this chart, but here I just show the bare facts: The quarterly forecast and where the real price went.
The forecasters here claimed that they were 95-99% accurate. Impressive, isn’t it? But if you look at the graph you may wonder how they come to 99% accuracy. Well, every quarter they only measure “this quarter”. They measure "How far did prices move away from the forecast this quarter”. They don’t measure this year or next year, or whether the direction was right or wrong. Only distance in this quarter. How about that? Is that a fair way to measure?
The really ugly part in graph 3 is that prices didn’t increase as they forecasted. Prices fell instead. How about that? So for 2 years in a row they made all the wrong forecasts, predicting uptrend after uptrend, but prices fell instead. And yet they were “95-99% accurate”.
You are actually a bit wrong when you think this Graph 3 forecast is 0% accurate. I look at things in terms of money. You see, I know someone who followed the advice of the graph 3 forecast and lost money every time. Let us say I gave these 5 wrong forecasts and people lost money on each forecast. If I now have 5 bad forecasts (losing money) and the next forecast is good (earning money). Would you then say that I have a score of 1/6 or 17%? I would not. In my book I need to get 5 right where they capture all the losses they had. Once we are square at “nothing lost/nothing earned” then I can call my track record 0%. Tuff? You bet. But that is the reality. Someone lost money 5 times in a row, and you need to earn this money back before you are at square. So after 5 right forecasts you are square at 0% and then no. 6 right forecast is giving you a slightly better average than 0% accuracy.
So you see, now I’m piling yet another layer of complexity on top.
By now I think you are perhaps convinced of my view that track records are a messy affair. If you were not convinced, you wouldn’t have read all of the above and gotten as far as this. The fact that you have made it so far means a lot.
At this point we don’t need to pile more complexities on top of the already high pile. There is really no need. But just to prove that I can continue, I’ll give just a few more hints at what I think should be done (if you really persisted on getting an accurate track record).
A. The accuracy percent should not be mixed together, but be separated in “uptrends” and “downtrends”. Let me take a concrete example. You will ideally sell your stock if I forecast a downtrend in the stock price. Let’s assume I forecast a 4 month downtrend, but the downtrend continues for 8 months, and gets 15% below my target. In that case my forecast was clearly not accurate...but the trend was right. Is that is a problem? Not really, because you sold the stock, you are out, and you’ve got your money. So the forecast accuracy is not that relevant in a downtrend. The TREND is important.
B. In an uptrend, however, the situation is in reverse. You buy the stock when I forecast an increase. So clearly you do not like the increase to be smaller and shorter than what I forecast, because my forecast was the premise you bought the stock on. So the forecast accuracy is much more important here. So you need to separate your forecast accuracy in uptrends and downtrends.
How to measure
Conclusion: You see what I’m doing? I’m taking a concept that you thought was really easy (“just measure the forecast accuracy”) and now I’m making it much, much more difficult - but also much more right. What do you want to measure?:
What a complicated mess! And I have now written 2 blogs on “track records” - which is a topic I really don’t care much for because of all the traps and egos and complexities. I just want to throw it all aside and wash my hands and start to do some really useful work - like analyzing the markets. And then two weeks later a guy says “Hmm, your work looks fine, but what is your track record?”. What should I tell him? All of this stuff in these two blogs? Too much! Or just give him a weak answer? You know what! I’ll direct him to this blog post. Then he can read it here, and I don’t have to go through it all with him. That’s what I’ll do. Great idea! Oh, is that why you are here??
You have two options now:
1. If you don't want to miss an update, then simply subscribe! It's free. Just write your e-mail address.
2. If you have a comment to the blog post, do share it with me. I don't have a public comment section, but you're welcome to write a line or two about the blog post you have just read.
I might add that the blog is cholesterol-free and non-fattening :-)
It might even exercise your brain cells. Or it might cause you to look up and say "hmmm" (which is the highest praise I could get).
21. May 2018
"What is your track record" - part 1
Questions about my track record
What are the most frequently asked questions about Technical Analysis? I have already gone through the top questions 2-5, so here goes no. 1: “How accurate are your forecasts? What is your track record?"
This is a topic I really like. But it is also a big topic, so I will divide this into 2 posts. When someone ask about my track record, here is what I usually say at the first contact:
“I can calculate this for you, no problem. You just need to tell me which method you prefer. There are 7 generic methods - or at least I thought there were 7 methods in calculating a track record, but I have seen a few extra “creative” ways. I cannot have 7-10 track records going on at any time, so I just need you to specify which method you require, and then I’ll do the track record”.
I always find that the company don't know the methods and which to choose. So the answer I give is: “It’s quite simple. If you have a forecast provider today, or some publication that you follow, then you would want me to use the same method they do. That way you can compare apples to apples, instead of oranges to apples. Easy, right? So what method do they use, and what is the track record of your current suppliers?”
If you are advanced in this business, you know I’m setting them up. I have to admit that, sorry. Because naturally they don’t know the track record of their current forecast supplier. And they certainly don’t know the method they use to calculate the track record. In all my years I haven’t seen anyone that are able to answer this question. But they should be able to answer it - if they asked their supplier. So at this point I’m saying: “Well, that’s curios. It is important to get a track record from me, but you don’t have a track record from your current supplier. How come? This means that I can give you any number, whatsoever, and you don’t have a clue whether this number is high or low, good or bad. You have nothing to compare it to.” In all my years I have yet to see a track record (with one exception, and that is a story in itself).
So, at this point I give it a twist: “It is ok that you don’t know the track record of your current forecast provider and the publications you follow. The job of the publications you follow is to act as a “football coach”, making you a better team and perform better. So their job over the past years have improved your game, so we should simply look at your own track record now. What is your own track record, and which method do you use? That way we can compare yours and mine. If your track record is much higher than mine, then you know that you don’t need to employ my forecasts. They will only drag you down. So let's compare. What is your own track record and how do you calculate it?”
By now you know the “twist”, because I have yet to see a track record from a company. They simply don’t track this. In essence this means that they don’t know their own track record and they don’t know the track record of their forecast supplier and publications. And they have nothing to compare with when I come with my numbers. Wow! But they want to appear “knowledgeable and critical” by asking about my track record.
You now get the twist. That is why I have a lot against track records in general. What I have done instead is to go into the company and calculate their actual track record, and then I use the same method for my work - and then we can compare. This makes sense because it is comparable - oranges to oranges.
I am assuming that when we talk about track record we have something tangible to measure. But many times we have something fuzzy instead. This is described by Peter Sainsbury (on the website “Materials Risk”): “Part of the problem is the fuzzy language in which many predictions are often expressed, making it difficult to tell if the forecast was right or wrong even after the event”.
According to Peter Sainsbury there has been a survey conducted by Author Michael Maubossin how people viewed forecasting language. What does it mean if there is a “serious possibility” that something happens. Is that higher or lower than “high probability”? What about “almost always”. A lot of these words are surveyed and measured. But these intangible, fuzzy words are a problem because you cannot make a track record. An example of this is shown here with a quote from CNBC:
“Geopolitical tensions will keep oil prices elevated heading into the summer driving season, but the energy market could be on track for a tumble in the second half of the year, according to....”.
Here the only tangible thing we have is “could”. Prices “could be on track to”. It’s hardly a forecast. And “could be on track for a tumble” is a question mark of what “tumble” is and for how long.
Fortunately the “fuzzy word problem” is not too big, because many forecaster use perfectly measureable words: Price + Time. Once you have those two components you can make a good track record, right? Or maybe? How about this:
“The EIA forecast that WTI oil will average $71/b in 2018 and $66/b in 2019”.
Here we have price and time, so you should be very satisfied. We are now in May and oil prices are at 79 USD, and you now have the EIA forecast for 2018, “average of 71 USD”. Is this of any use to you? You can measure the forecast (only once 2018 is gone), but it really doesn’t quality as a forecast that is practical and user-friendly here in May.
Now we go one step up in quality. We eliminate the fuzzy words, and we make the forecasts practical by showing “Price + Time”. So now it should be all right. Or is it:
Oilprice.com wrote in 2018: “At the end of February, 15 investment banks polled by The Wall Street Journal raised their oil price forecasts for a fifth consecutive month, and those banks now expect Brent prices to...”.
So as the forecast has been amended 5 times in 5 months, do we measure their original forecast or their new forecast? Or their 3. iteration? Our problem is what to measure when the forecast is changed. It would be absurd to demand that forecasts remain unchanged, because the world and input data change all the time. But on the other hand, if you can change your forecast 5 times and keep moving the target, then we sort of lose the purpose of the track record. Should we track the first or the last forecast?
One variant of forecast is the technical analysis. You should think I like them because I’m a technical analyst, but I don’t. I actually can’t stand them. This is just an example:
“The chart suggest an attempt to test the resistance level near the area of 79.50 and continue falling with the target below 75.70, the cancellation of the ....(a few technical words omitted)... will be a strong growth and breakdown of the level of 80.00, which will indicate the continued growth in the area above the level of 82.00”.
What you have just read is a real forecast by a technical analyst, but I don’t have a clue what it means. Maybe you are smarter than me, but I don’t know what to make of it. Are we aiming for a decline to 75.70 or an increase to 82.00? A lot of forecast are written in this way. I don’t understand it and I cannot measure it.
What if you gave two forecasts at the same time - which is very common: “The aim is a price increase to 82 USD into Q2, but a break below support at 77 is the start of a decline to 72 USD”.
If the price today is 78, and it goes to 82, then your track record is great. But should it fall from 78 and break below the support at 77, then you also have a good track record because you forecasted a decline. So in one sentence you have forecasted both an uptrend and a downtrend and get good scores if both happen. No matter what happens your forecast turn out great. Now that is a nice feat! So what to do with “alternate scenarios”? How to measure a track record?
Or what about a specific forecast that ends with “but this based on OPEC keeping their current production cut”. So if OPEC changes their production cut a month later, then the forecast is invalid. Should we then count their forecast into the track record or delete it?
I think I have managed my goal in this first blog about track record (stay tuned for the second part where I will show my track record). You are now seeing nothing but pitfalls. What started out by being "simple math" in making a track record has turned into a nightmare of fuzzy words, impractical forecasts, changing forecasts, incomprehensible language and alternate scenarios. That is why I am sceptical when people are so happy to embrace track records. First of all there are so many pitfalls. Secondly, they are mostly done “to look good” and to sell a product - not aiming at showing the true strength and weakness. And thirdly they are requested by people that want to seem knowledgeable, where they in fact have nothing to compare it with. I don’t see any winners here. Nothing but extra work and inflated egos on both sides, without any scientific integrity.
What I like instead, is to go to the company and find their “true track record” and compare apples to apples with my track record. This reveals where they are already strong and where they are weak. Do we find that they are strong in uptrends, whereas they make all their mistakes in downtrends? Or is it the other way around? So the companys own track record is what a “football coach” can use. Then the forecasters own track record should be calculated in the same way, so we can compare and see how much we potentially could lift them (realising, of course, that past performance is no guarantee for future performance). “You own track record is at XX over the past 3 years, and we can potentially lift that to an area around YY if we work specifically at the weakness that we find in this and this area”. That is real, that is tangible, that is result driven. That is thinking like a football coach that want the team to win.
Stay tuned for Part 2.
8. April 2018
"Should I buy now?"
Stories about impatient Neanderthals
What are the most frequently asked questions about Technical Analysis? I’ll give you the top 5 question I get during my speeches and courses on technical and fundamental analysis. I have already gone through question no. 3, 4 and 5, so here goes no. 2: “Should I buy now?”
When I am giving a lecture, I often invite people to ask for a particular commodity or instrument. The idea is to go through the analysis on something that they are very familiar with. That way they can compare all the buy/sell signals to what they have done themselves throughout time. So it is when we go through their particular instrument that they say: “What does the technical analysis say now? Should I buy now?”
A few of these question are based on impatience. They don’t really want to know about the methods, just the result. A kind of “I don’t care about the analysis, I just want to get a clear recommendation that I can act on, and that way I benefit”. So that is the age-old thing of whether to give a fish (so they don’t starve today) or whether to teach them how to fish (so they can feed themselves in the future). There are a few of this “fish today” kind of people, but fortunately not so many.
The reason why I think this question is important has to do with a misconception about technical analysis. I mean the question is seemingly straight forward: “What does the technical analysis say today - should I buy?” The misconception is that you go in at any given day and get a buy/sell signal. The same people can ask me three days later “So what does it say today?”. Nothing has happened in those three days, and there are no new signals. So there is a misconception here, and that leads me to a very important distinction between “Signal value” and “General value”.
When you ask for a buy/sell signal, you are looking for a specific point. Often it is a price break above the moving average. Or it is a break above a well-defined trendline, or an RSI level. In any case, we are looking for a specific signal. A break above the moving average is what you traditionally think of as a “buy signal” in technical analysis. But how often do we get a buy signal? Very infrequent. A break above the long moving average is often followed by an uptrend of 1-3 years. So you won’t get a break below the moving average in the next 1-3 years (I’m not counting false signals etc). Even if you go to the daily chart, then a break below the moving average is often followed with 3-6 months of trend. So you won’t get a new signal in that time.
So you see the problem when people assume there is a buy or sell signal every day? Even on the short term, if we had a break below the moving average 1-2 months ago, there is still perhaps 1-4 months of time to pass before we get a new break above the moving average. So there is simply not many buy/sell signals. And that is precisely the strength of technical analysis. If you had a new buy signal every week, then you would not have a “lasting trend”. The strength is that a buy signal means that you get in, and the trend will last months (or years, if you have a buy signal in the monthly chart).
When I tell people this, they get it. They understand how long the price trend continues and they understand the buy and sell signals. They get it. But then they have that final question that makes me throw my arms up in the air: “Okay, I understand this. But the last buy signal came 2 months ago, and I didn’t know about this type of analysis then, so I didn’t buy anything. Now we have seen 2 months of increase, so what does the technical analysis say today? Should I buy now?”.
You see the predicament? They understand the concept, and they realize they have a system that they can use for the rest of their lives, if they just follow it. Great stuff. But then the short-term nature of them always pop up, and want the “fish today”. We are simply not a very strategic humanoid creature in general. We can have flashes of strategic thinking - but only until we are hungry, and then our impatient Neanderthal in us is reaching for the baseball bat and just wants to club something - preferably NOW.
At this point you may very well be protesting. Your point is that even though we had a buy signal 2 months ago, both fundamental and technical analysis can give us an idea how much more prices will have to increase before hitting the top. And yes, you are right. We can do the analysis and get an idea of “how much more” the increase can continue before hitting a turning point. But there are some problems with this way of thinking.
The first problem is that now we are not dealing with a “signal”. The signal came 2 months ago with the break above the moving average. So when you ask me today, we have to look at the RSI value to determine how much more the uptrend is going to last. Or you will use cycle analysis or Elliott wave analysis to give an idea. But the first problem is that neither of these gives you a “signal”. They give you a “general value” in understanding some of the nature of the current uptrend, but they don’t give you a concrete, tangible result (and that is what people often expect).
An example: The uptrend has lasted 2 months, and the RSI is now 76. What does that tell you? Hmm, not a lot. Often (but not always) the RSI needs to go to 85 before the top is in. But then sometimes the RSI hits 85 and create a divergence (falling RSI but increasing price). So even if the RSI was 85 today (which it is not, it is at 76), you don’t know if 85 is the top, or if the RSI is going to make 1 or 2 divergences before we reach the price top. Similar problems are found with the other types of analysis.
You DO get a lot of value and understanding out of the RSI and the other types of analysis. You can form a mental picture of what is “possibly laying ahead”, and you get more and more information as the RSI develops. This is really good and useful. But it is not a signal that says “NOW”. And that is what a person sitting in the audience wants. He simply wants to know “What is the analysis saying now, today”. There are no signals today. There is only a “general value” in understanding that the uptrend started 2 months ago (where he didn’t buy anything), and that the uptrend is likely to continue a little while longer - but we don’t really know for how long.
Maybe next month we will get a development in the RSI that allow us to get a better idea of how close we are to the top. But that is not today, not now. And that is why the guy in the audience is not impressed with this crack-pot type of analysis. He just wants to know whether he should buy today, and the analysis doesn’t give an answer. He is into the “fish today” mode, impatient. He has, on the other hand, not a clue that we are dealing with a method that will keep making him fish in the future. Not everyone is in the mode of “How can I learn to fish better”.
The real conclusion, naturally, is that we keep the position we started 2 months ago. Easy, right?! Those of us who paid attention to the proper way of fishing got the buy signal 2 months ago, and we bought. And today we keep the position. And we know that we will get many more sell and buy signals in the future, and we will follow them one by one. Both following the concrete “signals” and also following the “general value” so we understand more or less what phase we are in.
So that concludes the question no. 2 I often get. But how can I explain all of this to a group of people. Especially if they are in the “fish today” mode of thinking. It will take too muc time away from the topic at hand, and it requires a deeper understanding of the nature of the analysis. So I often try a very abbreviated version of the above, even though it is not fully satisfactory. But now I can just refer to this text. “Read this link where I have the answer to your question” :-)
One short comment about “pain” before I leave the topic. Where I work we have a common phrase where we describe a situation as “RSI 76”. That is a code, more or less like the police have codes “10-4” etc. You see, whenever people come with a commodity they need to analyze, in the majority of cases the RSI is already at 76. That means that there is already a lot of pain (I’m referring to a buyer where a high commodity price is a problem).
RSI 0-20 is “no pain at all, and we don’t think there will ever be pain again”. RSI 80-100 is “excruciating pain and it will never go away again”. So RSI 80 is problematic for the company and the budgets. Over the years I have found that people often come at RSI 76. They don’t come at RSI 20 because there is no problem (but it is precisely at RSI 20 the problems start). And they don’t come at RSI 80, because there the pain is already too much. So they usually come when the pain is starting to build strongly and that is roughly at RSI 76.
RSI 76 is a difficult place. They should have been buying a long time ago when the signal was there (but they don’t know this signal and so they didn’t buy). At RSI 76 the pain is high, but the end of the uptrend is already in sight. So we can still buy, but we are only removing the final top of the problem. So it is a difficult spot.
I have found that what motivates people to act is “pain”. That gets them going, trying to find someone to help with the problem. And whenever we get a request like that, 95 out of a 100 times the person is in a “fish today” mode. There is too much pain. So he only focus on the pain at hand - and doesn't have the capacity to focus on the future buy/sell signals that will get him out of the predicament he is in today. He is only focused on the pain today, and he wants an aspirin that makes the headache go away. And I’ve learned that in that pain mode there is no use in bringing the fishing gear on the table and explain how he can use these tools in the future.
So now you have listened very patiently to me. I’m impressed! But you just have one more question: “Should I buy now?”
4. March 2018
“What if Technical and Fundamental analysis disagree?”
The no 3 question in the series
What are the most frequently asked questions about Technical Analysis? I’ll give you the top 5 question I get during my speeches and courses on technical and fundamental analysis. I have already gone through question no. 4 and 5, so here goes no. 3: What if Technical and Fundamental analysis disagree?
My first point is this: If you can even ask this question, that shows that you are quite advanced. Not many can do this. Now, if I’m giving a lecture on technical and fundamental, then it is naturally an obvious question. So there you don’t get any gold star for the question. But being able to ask this question at the onset, tells me how advanced you are.
Fundamental analysis is the old guy on the block, and that was traditionally what everyone was doing. Then much later in the 20th century the technical analysis came along as the new guy. For decades there was a war between the two, and I have written about this before. But I’m one of those who are advocating to merge these two elements. That was the topic of my Master thesis when I wrote that, and so the question stated at the start makes perfect sense for me.
I have put off posting this subject for a few months because of a problem. I simply wrote too much, too detailed. Rule no 1 is: “If you really want to bore people, do tell all the details”. So my post was way too long. I was actually a bit stuck until a few days ago when I got the solution. I don’t need to give you all the details in one blog, boring you mindless with pages and pages of text. Instead, I will give you a short overview of the 3 keys I use. Then in a later post we can go more in depth with the juicy details.
TA (technical analysis) and FA (fundamental analysis) each have their unique strength that the other one doesn’t. So it’s a perfect match as I see it. In another post I have gone through their unique strengths and weaknesses. I call this Facet Analysis but today I will show how to deal with a situation where they disagree. TA says “uptrend” and FA says “downtrend”, as an example. Or FA says “uptrend” and the TA says “maybe, but we don’t have a break above the moving average yet”.
Here is how I resolve the matter if TA and FA disagree:
The 3 Keys:
1. Disharmony - Decisiveness
2. Rule of thumb
3. Projecting and aligning
Key no 1. Disharmony - Decisiveness.
If TA and FA disagree, then don’t do anything rash or decisive. The disharmony is a warning not to put all your chips on red in the casino. What I have found is that “In a matter of months, they will re-align again”. I am always surprised how often TA and FA agree, and when they disagree, it is usually short-lived (not counting in days or weeks, but counting in months). So its quite simple: If you choose one analysis over the other, you may choose right, but you may choose wrong. Why expose yourself to something that is so indecisive? Don’t trade, or don’t overtrade. And if you do trade, make sure you monitor it closely and set stop-losses. So it’s quite simple. The disagreement is a warning for you, and you better heed it.
Key no. 2 - Rule of thumb
Your counter-argument could be “But what if I have to trade?”. If you are buying commodities on behalf of a company, you can be in a situation where you don’t have the luxury of being able to wait - whereas buying a stock for yourself is something you can always postpone. In case you do have to make a decision (not a good place to be forced into), then I have a rule of thumb that I use.My rule of thumb is that I listen to both, but my actions are driven by this rule:
Technical analysis weighs 100% when prices are below the moving average - and fundamentals weighs 60% when prices are above the moving average.
This rule requires some explanation and examples. This is the juicy part that got way too long. So I have to post the details another time. I have already done a short piece on this earlier here - but I will do a better and more detailed example later. The rule is important and it deserves a good explanation with lots of examples.
Key no 3: Projecting and aligning.
This method will also need a further explanation later, but the short idea is this: You can look at the data and project how they will go in the future and spot where TA and FA is aligned again. A very simple example could be that TA shows the start of an uptrend, but FA does not agree. But looking at the current high inventory level, you then see that USDA forecast a one year downtrend in inventories from this month onward (which will push prices upward). So FA will soon turn around and agree upon an uptrend in prices. This is a very simple example, but the fundamentals are full of story telling that leads the way to a future where you can see TA and FA aligning again. The example I showed is for a commodity (inventories), but you can do the same for stocks with earnings etc. If a stock has high earnings, and the company is coming with a profit warning, then this “future event” will likely align with the signals you are seeing in the TA. Already now you can see that there is a “time component” in the disagreement. When TA and FA disagree, it is often at turning points, and here TA is often first and then FA comes later. If you study the succession of turning points 10 years back in time you can see a pattern that you can use in the current situation. You now understand your stock/commodity/investment much, much better. You become what I have termed “a wildlife researcher”. That’s called learning from history (and I usually quote Churchill on that), and that is my Key no. 3.
So there you have it. 3 keys to solve the cases where technical and fundamental analysis disagree. By "Keys" I play on the analogy of physical keys made of metal that unlocks the disparity, but also keys on a piano. The keys on the piano now plays in succession, creating a tune, turning disagreement into a catching melody. There is an order to it. You just have to find it.
Oh, and your next question is "What are the other questions in the top 5??” The question I get the most are:
1. “How accurate are your forecasts?”
2. “Should I buy now?”
3. “What if Technical and Fundamental analysis disagree?”
4. “What effect will XYZ (Brexit, the US election, any kind of upcoming hot topic) have on the market?”
5. "Where can I see the future price movement?"
What question do you have?
2. July 2017
Feynman and the eternal energy
Time for a cup of coffe and a philosophical thought
When I’m doing a price analysis, I’m sort of playing with different types of models, making lego blocks fit together, fusing atoms, building domino sequences and all along trying to get a feel for how the price is behaving to stimuli. I’m both a scientist, a historian, an experimenter, a wild eyed wonderer and a thinker. And sometimes, just sometimes, that is what we need in this world. Someone, perhaps, like the physicist Feynman.
Allow me a very small detour: If you heat up a cup of coffee then the molecules bounce and wriggle very fast. Fast motion creates heat. And the coffee molecules bounce around and also hit the coffee cup. And this repeated bouncing against the walls agitates the cup, and makes its own molecules bounce as well. And that way the coffee cup slowly gets more and more hot. So now both the coffee and the cup is hot. And the bouncing molecules in the cup hits the table, and slowly the tables own molecules gets hot. Remove the cup and feel the table, and you'll find it hotter than the area beside it.
All of this interaction spreads, and the coffee loses some of its warmth into the cup, and the cup loses some of its warmth into the table. So gradually things cools down. That is the law of thermodynamics. That is an inescapable law of physics. No energy is ever lost, but it's being transferred and it loses its heat. It's inescapable. Except for special people like Feynman that beat the system. You see, special teachers don't spread physical molecules only, but they spread imagination, enthusiasm and curiosity. And whenever you get in contact with them, that spark your own imagination, enthusiasm and curiosity into action. Your own molecules start moving faster as a result. And now we have created warmth without the loss of any energy. In fact, one mans enthusiasm viewed in a video clip is 'stored energy' that affects people, whenever they view it. It's like eternal energy. That is the energy of the future. So Feynman has beat the thermodynamics.
Do have a look at 2 short minutes here with Feynman. What he is saying doesn’t apply to physics only, but equally to technical and fundamental analysis and price action. And then start to look at more youtube clips of him. Now here’s a guy I would really want to have a talk with over a cup of coffee! I think we need more guys like him.
26. March 2017
The Z dimension
The third dimension in Facet Analysis
This is the secret Z dimension. I withheld that dimension from you in my last blog (Facet Analysis on 4. March 2017). I only described the X axis and the Y axis, but today we will finalize it with the mysterious Z axis.
In the Z axis I'm being even more tough on you. You probably thought that I was already being pretty demanding on you, because I wanted you to do three types of analysis (fundamental, technical and macroeconomic analysis). Am I right? Yes, that is pretty tough, but now I'll turn it up a notch more and add pressure by saying that the Z dimensions have 3 layers you need to do!
The 3 layers form a continuum but it is better to show this in a video, so click and watch - if you are up for more work :-)
4. March 2017
The future is here: Facet Analysis
A revolutionary development in analysis
It’s been a few weeks since my last entry because I’ve been working on this new concept. This is probably the most important blog I have written. I'll time stamp this blog as “March 2017”, and say "you heard it first here". The term Facet analysis is what you heard first here. That may be a bit too pompous for my taste, but we are certainly on the way to something revolutionary here, and this requires a new term.
People often ask "are you a technical analyst or a fundamental analyst?". This is so old and outdated, that I’m sighing. For me that is like asking a carpenter "Do you only use a hammer in your work, or do you also use a saw?". The carpenter would not really understand the question. Of course he uses both. But he also uses a screw driver and sand paper and so on. He likes all tools, regardless of what they are called. If they do the job, then he likes the tool. The thing is: Each facet requires a different tool.
The true benefit of facet analysis is that it is a more advanced and robust analysis. But one of the side benefits of facet analysis is that it puts an end to the tedious war between fundamental analysts and technical analysts. It is simply so old and outdated, so dinosaur extinct. Let’s get to the next level, shall we? Now, please!
Facets of a diamond
The "next level" is what I term Facet Analysis, and this is combining:
For those who start to see the light of evolution here: No, it is not a mere "addition" of three parts. It is not just taking three independent types of analysis and “if they all say buy, then we are more safe”. If it were only that, then we were simply slapping three totally different systems on top of each other and duct taping them together. That is hardly worth a new name. Duct tape is not a new invention.
Instead of duct tape we are fitting analysis together on the X, Y and Z axis! We are matching the types of analysis together, much like Lego blocks. They FIT together, filling out the missing parts in the other. The requirement is that they fit together both on the X axis, the Y axis and the Z axis. The video will show this. The three types of analysis are created to snap onto each other and make a strong unit. Like man and woman are meant to complement each other, having different strengths that the other one doesn't have, and that they need. How can we NOT see that these are meant to complement each other? It is so natural. I don't get it, because it is so obvious to me. But that is how evolution works. Some learn to make fire and benefit from this, and others don't bother to collect wood and so they freeze and become extinct over time. There is some Darwinism at play here, because this process is naturally quite slow like the evolution of species. But my point is, unless you are old and stuck in your dinosaur ways, why would you not want to be part of something new, evolutionary and better?
The secret is in the sauce...
The secret of the system is the X, Y and Z axis, and I will show this in the video. It ends a bit abrupt because I hit the time limit for video, but that's ok. I cover the X and the Y axis in this video. The Z axis is something I'll convey in my next blog.
After you have seen the video I hope you understand how intricate the systems fit together. How each type of analysis has some strong points that the others don’t, and in what way and time they work together.
Raising the bar
Ok, so what is an obvious problem? Facet analysis means that you should be versed in multiple types of analysis, and yes, that means that you need to spend much more time getting to know these types of analysis. You are no longer a one-trick pony. You learn how to perform them and learn the pros and cons of every one of them. We are raising the bar here, so get over it and wipe away those tears. What is the alternative? Stick to what you know, clutching your one "my preciousss" favourite?
No-one expects you to be fluent in 5 languages, and we don't expect you to be a master of all types of analysis. But you should be able to do them to some degree. I speak Danish quite perfectly, English rather well, German so-so in an informal situation, French with a very good pronunciation but with an extremely limited vocabulary, and both Spanish and Cantonese only hanging on to the barest thread. The same type of thing will normally happen with types of analysis. You are not expected to be equally good at all types of analysis. I have written a blog about this - Do you know your own analysis DNA? . Have a look and test yourself!
The question and the answer
So the wrong question is: Are you a fundamental analyst or are you a technical analyst? If you refuse to be a dinosaur, then the answer is "I'm a Facet Analyst". This is much more than just saying that I'm 50/50 - a combination of 1+1+1. Instead you are utilising a dynamic interchange of tools on the X, the Y and the Z axis - addressing all the facet of TAD - Timing, Amplitude and Direction. A true step in a more advanced direction.
You have reached the end of the line. The older blog posts have been moved to the Archive. Please click here to read them.
...but of course there's an exception. Below you'll find one more blog post (just one), which is the first blog post that started it all...
25. October 2015
Here it goes...
I finally got around to start my own blog. There is no better way to say it than that (and in that quote I give a nod to Jason, a fellow blogger in HK). I've been thinking about starting a blog, and although I have put it off for years it kept nagging at me. Even saying "Good idea, I might come around to doing a blog at some point" (an otherwise excellent 'postponing technique') did not make it go away, and I'm left at a place where I simply have to start. So here it goes. There's no aim for perfection, there's no room for academic language (makes me gag), and there's no other road than to get messy and involved in everything that strikes my fancy and interests me. I write for my desk drawer and an audience of one. Come to think of it, that may likely be the only way to write for many.
This blog may transform and morph during time. Everything does. Well, not everything, but everything "alive" does. But the idea is to start with financial analysis from two angles: 1. A tool based angle where I discuss my favorite combination of indicators and new revelations. Here I get to be nerdy. The second angle: 2. A commentary on various stock indices, commodities and macro economic developments as seen from the perspective of the tools. I don't expect an equal blend of these two, but look forward to see the shift between yin and yang in them.
I'll try to make each section short. I'm lying, I know, but I'm just starting out here, so cut me some slack. But I vouch to ramble and get off track once in a while, and then veer back on track again. Also I want to include photos in every section. This is a personal thing for me. As much as I like personal writing, I can't stand if it is too long or boring, or if it is without interesting photoes or graphs. My eye is visual like you won't believe, and I crave stimulus to keep me interested. So it seems you can expect "short ramblings with photoes". See, already here I'm a surprise to myself. Something I didn't really realize until now. So welcome to my experiment.