In The Final Analysis, Look At The Flip Side Before Laying A Bet

The Age

Saturday April 9, 2005

MARCUS PADLEY

TECHNICAL analysis is the examination of past price movements to forecast future price movements. As a broker making a living from "fundamental" analysis (the study of companies), it is natural to be a sceptic. So I challenged an experienced technical analyst and mate to sit down for half an hour and convince me of his metier. This is how it went.

First, he asked me to voice my doubts. So here they are:

? If you flipped a coin 100 times and it came up heads 60 times, technical analysts would tell you it was more likely to come up heads next throw. They'd be wrong, but that's technical analysis.

? Technical analysis tells you to buy things after they've gone up and to sell things after they've gone down.

? Technical analysts change their mind all the time, without remorse.

? Technical analysis is like religion; a big hole to throw all your uncertainties into, knowing you'll get a clear solution given back. That's what sells. It's not because it's right.

? The only reason technical analysis works is because so many other people are using it.

? Technical analysis is about making money out of selling a software package, not making money in the stockmarket.

? What's the difference between an online gambler and a professional technical analyst? Answer: two weeks.

I was sufficiently smug with that. Then he came back. The flip side:

? True, many people are more interested in selling technical analysis than using it. Yes, it lends itself to software, theories and "easy answer" solutions. It doesn't mean it's wrong. It isn't such a strong body of work because it doesn't work.

? Yes, there are a lot of half-baked technical analysts; it doesn't mean the experienced, educated ones are half-baked as well. Anyway (he went on and on), there are more half-baked fundamental analysts among the broker dealers than you can poke a stick at (can't argue, I am one).

? When it comes to trading, you are dealing with the supply and demand for stock. Technical analysis is a study of that supply and demand and its patterns. The return on capital of the company's Brazilian subsidiary is just irrelevant.

? A share price represents/reflects all the known information available already. All that's left to you is whether there are more buyers than sellers. Technical analysis will tell you that.

? Yes, technical analysts change their view. It is because they have identified a change in the supply and demand for stock. That information is more useful than being misled by a fundamental analyst sticking to his recommendation for credibility or corporate favour.

And so it went on. Truth is, we respect each other, and use each other. Two opinions are better than one. When we disagree, we spend that extra minute thinking about it. When we agree, it gives me someone to blame when we both get it wrong.

Marcus Padley is a stockbroker and author of the daily stockmarket newsletter marcustoday.com.au

COMING FLOATS

Company Money raised Proposed listing time

Alpha Financial Products $200m April 13

Australian Energy Developments $55m May 3

Australian Renewable Fuels $20m May 6

Australian Repackaged Transactions $200m tba

Bow Energy $6m May 20

Curnamona Energy $5.65m April 19

Dexion $45.9m May 3

Emeco $125m May 3

Fat Prophets Australia Fund $40m April 21

Hastings High Yield Fund $300m April 11

Kryocor $5.5m May 9

Macquarie Radio Network $3.16m April 20

PepinNini Minerals $3.5m-$4.5m April 11

Pro-Pac Packaging $11.92m May 4

Queensland Ores $6m April 26

Sundance Energy Australia $7.75m April 28

TAPS Trust $110m May 6

Transpacific Industries Group $175.4m-$210.5m May 3

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