Technical Analysis- ignore it at your own risk

A reader, ronnie posted this comment yesterday: "Did u called to buy citi @ USD48 & MEGB @ 2.12 ? I got this from >http://samgang.blogspot.com/2011/06/v-didnt-i-told-u-not-2-touch-call.html". I like to take the opportunity to address this comment to all my readers.

The first thing you should know is where Sam is coming from? His main objective is to run me out of town because I am putting up my investment thoughts & recommendations for free which could be a threat to his subscription-based website or weblog. Then again, there are so many free websites or weblogs out there and I wonder why he is so persistent in attacking me or Nexttrade. I do not know the answer to that question. Sometime it is hard to fathom the action & thinking of some people. It only shows that there are all kinds of people in this world & we just have to learn to live with them.

To the question of whether I call a buy on Citigroup, the answer is YES (here). It was one of those calls that didn't pan out. Then again, I also called a buy on Esso, Exxon & Genting SP (here, here & here) which panned out very well. Alas, Sam did not mention those. Not every call works out the way we want it to. While some analysts or bloggers may trumpet their many wonderful BUY calls which work out while remaining silent on those that bombed, I choose to do neither. If you have been in the investment business long enough, you would know that we can't get it right all the time. You only hope to get it right more often than getting it wrong. You have to be humble to accept that you were wrong-footed from time to time, just as you should accept success calmly. Should I do victory laps because my recent calls- BLDPLNT & Delloyd- are zooming up. NO. Everyday is a new day.

Sam likes to pigeon-holed me or Nexttrade as a weblog that only makes calls based on technical analysis. My readers would know that's not the truth. As an accountant by training & a remisier for far too long, I like to bring a holistic approach to investment. Sam talks a lot about fundamental analysis. I have no quarrel with anyone using fundamental analysis. Some of the best investment calls are based on fundamental analysis, such as George Soros’s bet against the British Pound in 1987 or John Paulson’s bet against the sub-prime mortgages in 2008.

Not every call based on fundamental analysis works out fantastically. Why? Because at the other end of the trade is someone who has also done his fundamental analysis and came out with the opposite conclusion. You would have a 50:50 chance of a positive outcome for every call you’ve made. Of course, one always believes that his fundamental analysis can never go wrong but the truth is the market always catches up with us and prices reflect the odd. You would encounter a stalemate. What is a stalemate? Have you ever hold a cheap stock which never moves? Until one fine day, it shoots up & we quickly sell it off only to see it soars through the roof. Why? The simple answer is that there is a change in the market perception where the underlying reason is something fundamental which the market does not know yet. This change in the market perception is captured in the price chart.

What is a price chart? It is a recording of all price data, overlaid with various indicators to give us an insight into the psychology of the market players. A price chart is the basic tool of a technical analyst or technician. The basic premise of technical analysis is human behavior remains unchanged throughout history. We may say those who do not learn from history will bound to repeat it. And, it seems that we always never learn from history because we are creatures governed by two powerful emotions- greed & fear. This behavior that we have seen in the past, we would see again in the future. This applies not only to the stock market. It applies to every market where there are sufficient buyers & sellers. Have you heard people questioning how a terrace house in Desa Park City on the outskirt of Kuala Lumpur can shoot up to RM2 million each when only 2 years back it was selling for RM600k. Were you brave enough to buy when it shot above RM700-800k? That’s the basis for the technical rule that you should buy when a stock breaks new high. Apply it intelligently, while taking precaution (or protective stops), it could be a rewarding trading strategy.

There are many principles & rules which make up technical analysis and many of them are intertwined with trading rules & money management rules. Some condemn technical analysis because it always deals with probability, instead of certainty. How certain are you that fundamental analysis is more reliable than technical analysis? I would not accept any criticism of technical analysis from Sam or anyone who knows nothing about technical analysis. Technical analysis- a skill that is so integral to investment & trading- is something that we all should master. Strangely, Sam chooses not only, not to master this skill but instead to wear his ignorance as a badge of honor.

Finally, my position on the MEGB is oversimplified by Sam. This is one of Sam’s many traits which I find irritating & unprofessional. The others traits are his quarrelsome nature, his rude remarks & persistent name-calling. On MEGB, you would get a better picture of the development of my position on MEGB by going here. The sequence of posts is as follows:

1. I questioned MEGB’s exceptional high profit margin prior to its listing in May 2010;
2. I posted my call to avoid the stocks of educational group (especially MEGB) on September 2010;
3. I highlighted the possible support for MEGB as it trended lower in October 2010;
4. I posted a possible trading BUY on MEGB in January 2011;
5. I posted another possible trading BUY on MEGB in April 2011.

I would say a reader who has acted on my calls (4 or 5) could make a small contra gain if he has traded on the stock. If he had bought & held onto it, he would be having paper loss of 40-50 sen each. On the other hand, if we short the stock (which is not possible or difficult to do in Malaysia) based on my calls (1& 2), we would have made RM1.60-2.00 each.

Let me conclude by saying that the internet is a wonderful thing. It opened up a whole new avenue for people to learn new things or to express themselves. I hope that people would use it carefully and for good purposes. I wish Sam all the best in his work and I hope that one day Sam & I can meet up & have a polite discussion about the pros & cons of technical analysis. Until then, I hope to see an improvement in our discourse on this subject. Let's agree to disagree, if need be.