Adventures in Technical Analysis, Jim Cramer Edition

If you like seeing Jim Cramer get his comeuppance, you'll love this video. It's a bit long, but basically on Friday June 13, Cramer told his viewers to "buy buy buy" banks, homebuilders, etc., on the strength of something called an "oscillator". One week later, those stocks had been hit hard, and he told his viewers that if they owned banks, homebuilders, etc, then he couldn't help them, because:

"If you own any of them, well, you obviously are like the golem: 'I'm not listening, I'm not listening'. You're not listening to the show." 

There are two things we can learn from this, besides the obvious one that Cramer has the memory of a goldfish and no one should ever listen to him. The first is that he knows nothing of Jewish folklore. The second is that stock traders don't know anything.

It's not just Cramer, is the point. They all do it: even much smarter and much more analytical traders like Barry Ritholtz do it too. Do what? Resort to "technical analysis", which is the art of drawing lines on charts and extrapolating from them what the market is going to do next.

Whenever you hear words like "overbought" or "oversold" or "momentum" or "support" or "resistance", it means that whatever you're hearing is garbage. But it also means that the person you're listening to has no idea what's about to happen, and is therefore resorting to the financial equivalent of astrology. In such cases, it's worth ignoring the message completely, but it's also worth having some serious thoughts about the messenger, too.

If you don't have any bright ideas about which way the market is going, there are two roads you can take. The smart and sensible route is to say "I don't have any bright ideas about which way the market is going." The dumb route is to get out your charts and start making predictions on the strength of technical analysis. So the next time you see someone doing that, ask yourself why they don't simply admit that they don't know. It would be much more honest, and much more useful.

(HT: Tilson)

Comments

[GatorTrader]

I am skeptical of anyone - technician or otherwise - who thinks they are the guardian of all market knowledge and wisdom. By broadly criticizing technical analysis, apparently, you - like Cramer - think you have all the answers.

[bobotheclown]

Most good technicians don't rely solely on charts, not to mention one of the rules of technical analysis is to not use technical analysis when the markets trading sideways.

[gene inger]

'Korrekt' points about Cramer's memory lapses; however not so korrekt (pun intended) about technical analysis, which reflects fundamentals in a sense.

For those few of us who interrelate technical analysis with the fundamentals, to grasp the psychological prospects ahead; technical work does not lie. To wit: in early 2007 we noted poor breadth aside the narrow universe of participating upside stocks; interrelated the earliest NASD brokerage liquidations related to excess CMO's held in 'house accounts', and concluded the S&P and Dow were having solo-walks to the upside which would not be sustainable, and worse, were masking distribution under-cover of a strong Dow and S&P. That proved not only prescient and 'korrekt', but is (in my 38 years of experience) the appropriate way to utilize technical analysis.

of course I concur with you about just drawing lines without info that underlies the basis for simply saying if this crosses this then that; so you are right; but only as far as it goes. We have had the honor of calling the lowest (of Mansfield's 16-established analysts) Dow call in late 2006, and were number 1. We also are looking at a crashed market aside certain segments; and have our views about where this is leading as the year evolves.

cheers
gene inger
ingerletter.com

[pdd]

What a shame to see crap like this on a great site. It's fine to find fault but please provide a solution to the problem, even MPT.

[yogatrader]

uh, "the solution" is to admit you don't know and discuss the things where you have more clarity, or speak in probabilities, not certainties.

the need for 24-7 content/ commentary fuels such nonsense/ noise, but provides entertainment and distraction for the process of trading that takes maybe 2 hours a week, tops.

good piece. cheers,
yt

[calvino]

Pathetic, no, sad.. no pathetic.. no sad.. I can't make up my mind.

[strife]

I'm pretty sure he was referring to Gollum from "Lord of the Rings."

[Jameel]

He said to buy the stuff as a what?......... a TRADE. hmmmmmm... Does that mean you hold on to it??? NOOOO. He said to buy the oil stocks when they pull back. If you know him you know he has hated the banks for a while. I'm convinced, as he has used the word trade, that he felt that you could pick up a little money because the market would rally after being oversold. He was wrong about the rally. I think the rally happens this week. The next week's show was just a reiteration of his disdain for the banks as an INVESTMENT right NOW. If you know anything about Cramer you know that oil is a long term play for him. So he got it wrong in the week about oil, it doesn't mean he doesn't like oil. He said to Buy on pullbacks. If you don't take into the context of what he says and don't do your own research yes you will be crushed. He's been recommending oil ag and minerals for a heck of a long time now. Even before their huge run ups. Is anyone on here praising that?? Do an article about how I'm about to catch a double on MON and POT because Cramer recommended them and I did my own research, agreed, and bought them.

[watchinglines]

To the author Felix...

Thank you for opening my eyes!

Felix, what experience do you have? I did not notice anything in your bio that has to do with real world investing. You may write a good story, but...

Quote: "Whenever you hear words like "overbought" or "oversold" or "momentum" or "support" or "resistance"... it means that whatever you're hearing is garbage. But it also means that the person you're listening to has no idea what's about to happen, and is therefore resorting to the financial equivalent of astrology." I would be ashamed to make this statement in a public venue. It is apparent you have no experience in this field, or you just like to hear yourself speak. You have embarrassed yourself by authoring this drivel and the credibility of Seeking Alpha is lowered by publishing it.

I have been a Registered Representative for 23 years, a Registered Investment Advisor for 19 years, and have spent the last 21 years applying technical analysis to my customer's portfolios. In your writings, did you call the start of the bull run in 1991? Did you get your customers out...wait, you don't have any, sorry...did you write about getting out of the markets in December of 2000? Did you write to the untrained masses telling them to get back in around May of 2003? Have you told them two weeks ago to start heading for the door in regards to the S&P 500? I think not. No, I know you didn't.

Anyone that has experience in applying technical analysis knows that you never anticipate the indicators. It is another tool in your arsenal to use to help giude you.

You are more of an attention hound than Jim Cramer, and your opinions prove you know less. In the future, please keep your uneducated opinions to yourself. This piece should be titled Ramblings from the Incredibly Stupid.

[Jameel]

Further clarification
My friend drew says
"All right here we go again, since a few of us do not know how to read between
the lines and/or interpret the show. The Game Plan segment of the show is the
only trader specific part of the show. He has said this time and time again.
So he followed the oscillator...big deal...there wasn't a rally. The
oscillator is normally very accurate, has only been wrong something like 2 or 3
times in the past 20 years. And last, the author of the article obviously does
not watch Cramer very often, since he seems to berate Cramer as a technical
trader and Cramer hates technical trading. The only technical indicator he
adheres to is the oscillator."

[Zach Bass]

Felix, your argument is a non-sequitur. Your conclusion that technical analysis is useless because Cramer has the memory of a goldfish is illogical and rhetorical.

Also, TA is not the art of drawing lines on charts, it's the art of analyzing mob behavior and sentiment. You diminish a craft that you obviously know nothing about. I guess it's much easier to diss something of which you obviously know nothing. So, I guess that makes you an expert at criticizing nothing.

[Skjellifetti]

"Charts are great for predicting the past." -- Peter Lynch

"I realized technical analysis didn't work when I turned the charts upside down and didn't get a different answer" -- Warren Buffett

"If past history was all there was to the game, the richest people would be librarians." -- Warren Buffett

Zack Bass, however, is correct that Salmon's argument is a rhetorical fallacy (as is my own appeal to authority argument above). The real question is to ask if there are any definitive studies that show that technical analysis is predictive of the future and not just the past.

[Jim Hawthorne]

This is by far the silliest article I have ever read on this outstanding site.

Jim Cramer cranks out some form of entertainment, and by tossing out his recommendations to his ditto-head followers has frequently provided excellent opportunities for some of us to short a couple of day later, a practice made popular by Barron's.

Jim Cramer is NOT a practitioner of technical analysis. Felix, you either know better or are an ignorant fraud.

Technical analysis gives us a snapshot of collective market psychology and dominant trends. It also shows us where a stock has been and where it is most likely to go. Nothing is ever certain, but to ignore these things would be a monumental stupidity.

As traders, we need every edge we can get; technical AND fundamental analysis are critically important tools. Today's trading environment has shifted radically from what it was back in the last century.

This article has some of the same aroma that we usually associate with Cramer. Go take a shower.

[jayme]

humm
so sad, you were doing fine kid, till you bash on the T.A, you offended a lot of people in here, plus, you diminish an art, that certainly is more than just "drawing dots and lines" .

you should measure your words next time

[ItsJustMe]

Fundamental analysis is for long-term investors like Buffett. Technical analysis is for short-term traders. I've made a LOT of money over the years using technical analysis and I know people who have made millions more than me so I have to chuckle at someone suggesting it's financial astrology.

Since technical analysis is based on the study of human crowd behavior, I suppose that it's good for writers to tell the crowd it's nonsense so that it will continue to work. Technical analysis is also based on probabilities and approximations which is where Cramer - a fundamental investor by nature and not a technical trader - screwed up. You NEVER, NEVER, NEVER rely on just one technical indicator no matter how reliable it has been in the past.

I've been short this market since May 15th and neither I nor any of the technicians I follow were expecting a huge market bounce last week so I don't know where Cramer got this mysterious "slam-dunk oscillator" he was using.

And congrats on the video - that was funny!

[Xyrus]

Obviously, someone who has never had a statistics course, nor a course in psychology.

Technical analysis has little to do with "drawing lines on charts". Admittedly, some of the more esoteric methods have little basis as they are more subjective than objective. But the main thrust of technical analysis is determining market sentiment based on market related data.

There is no way any method can predict the future. The best they provide is probabilities. Those that claim to have perfectly timed a bottom or a top have as much to thank for luck as any analysis.

In fact, market analysis in general can be thought of as a means of increasing the signal to noise ratio. In volatile or side-ways markets, there is far too much noise no matter which method you use. In trending markets however, such analysis can help determine aspects such as strength and breadth.

TA isn't the end all be all, but neither is any other form of market analysis. It all comes down to probabilities in the end. There are no sure bets. There is always the chance of unexpected news or irrational behavior. After all, the markets are only human.

~X~

[User 215137]

Hey Fishy,

I hold 6 NASD licenses, have been working on wall street trading desk for 14 years, was a prop day trader and regularly moved 75,000 shares a day a side for 6 years and made six figure incomes AS A TECHNICAL ANALYST - by reading oscillators and drawing lines on charts and using patterns and chart set ups. I have used technical analysis to profitably trade stocks, stock options, corporate bonds and treasury bonds.

Now, explain to me your trading background. How much trading have you done? What are your credentials?

Or are you just another sniper with a pen? A journalist who pretends to know something, anything about the markets?

Step up to the plate Fishy - what do you got? I am betting nothing but a permanent pass to the peanut gallery.

[curious cat]

to anyone that is still confused regarding the applicability of technical analysis, let me add that i frequented the race track for many years, during which i learned that the crowd controlled the odds on the board, "before" the race. they did not control the race. knowing how they bet, could easily improve your winnings, if you were a better handicapper. you could balance reward with risk and bet what you considered good horses when the crowd disfavored them. still, if you were a good handicapper, you could make money regardless of how the crowd bet.

in the stock market, however, the crowd controls the odds "during" the race. knowing what they are thinking is mandatory. how they have bet is an indication to what they are thinking. they may be dead wrong about the horse and beat the price down significantly. they can break your horse before it has a chance to run.

...and, they're off!

[User 190045]

Cramer's value, or lack of, for investors is in the statistics. Does anyone know what his recommendations have returned over one, three and five years? [e-mail]

[veryold]

Who else has been able to capture the attention of college kids, and even younger kids? He makes some mistakes, yes, but he fulfills his mission to entertain and educate. He has a following and those who really follow him do homework and come to their own conclusions about investing.

[francis schutte]

Technical Analysis is a great instrument if it is used in conjunction with fundamental analysis...and (extremely important) if it is not confined to one market. Only a global view of world charts: bonds, stocks, commodities, forex gives one an idea of what an how investments need to be readjusted. We were one of the few forecasting the crash of the Japanese markets in 1989...and I am more or less sure, it won't have been possible with fundamental analysis alone. TA was and still is a very usefull instrument..on condition it is used wisely. Simple life examples are shown on the web site goldonomic.com. It is applied to Gold, the major world indexes and the bond markets. Last but not least, EXPERIENCE is extremely important..and after 25 years one starts to know the rules of this very complicated art.

[cashsa4]

There are no rules, simply random activity.

How often are your "patterns" reliable, even if used in conjunction with other information?

If you've been lucky, you'll give me a high percentage.

If you haven't been lucky, you won't give me a percentage.

Both TA and FA simply cannot be reliable due to the randomness of events.

If you are trading stock X using TA or FA, or both, and you make an investment decision based on that information, and a company in that industry releases bad earnings data (or 9/11 happens), that data you are making decisions off of becomes less, or completely not, useful. How could an analyst, or any type of analysis, have taken things like those into account?

[francis schutte]

Some people will always make the wrong investment decision, even using both TA and FA . Simply because they don't understand what it all is about. I think that as past founding vice-president of the IFTA (international federation of technical analysts), I know what I am talking about.

[cashsa4]

Dear Francis Schutte,

I think that your position with the IFTA is impressive.

However, I don't see how you refuted my argument about randomness. How is someone supposed to know what they are looking at if it is simply not there?

[John Tandlich]

Just more proof that technical analysis is no better than consulting a gypsy fortune teller.

[John Tandlich]

Does CNBC stand for "Cramer's Nothing But Crap?"

[cjespo]

Being against Cramer is one thing. Saying technical analysis is a waste of time is unfounded. There are obvious good points in tech analysis and good technicl analysits exist that prove you wrong. Even a above 50% confidence level is better than nothing on determining when to get out and when in is safe to be in. Your alternative is nothing.

[User 224378]

Cramer is entertainment for people...we all know no to take his picks seriously, but maybe listen to his logic to see if there is anything new or interesting to learn...my question is...

why does he have his own "Cramer Picks" section in SeekingAlpha?