Garbage in garbage out
Posted by Danny on August 25, 2014
What ingredients go into our trading decisions? Opinions we hear in the financial media? Technical indicators that draw colorful lines on our screen? The latest forward “guidance” issued by the central bank? The next full moon or Jupiter in Leo? The AAII sentiment survey numbers? The stock picks we see on scutify.com? The Elliott wave count? Kayla Tausche’s smile? The geopolitical ebb and flow? Seasonal tendencies?
“Garbage in garbage out” is a saying that originates from computer programming, but it also applies to trading. More on that after our weekly look at the market.
Let’s jump right in with the latest Nasdaq chart (click for larger image):
The markets have been kind to my latest forecasts for Nasdaq and have climbed straight to the 4530 target. See: Setting up for an August peak and Bending but not Breaking. But let’s not get carried away. Markets being markets: pat yourself on the back for good results and the next thing the market gives you is a good slap in the face. Last week’s results are of no help in the next. The confidence gathered in week 1 can become a trader’s undoing in week 2. That’s in the nature of the beast we call a stock market. But you knew that already, isn’t it?
So, here we are at 4530. The Nasdaq is bumping into an overhead trend line. The lunar Green period is set to end later this week. Sell quick? Hmmm, maybe.
Technically my Earl indicator is just turning down, suggesting some kind of pullback is up next. And the MoM is reaching a very optimistic +8 level, the kind of stuff that has made for peaks in the past.
But the slower Earl2 has just turned up from major bottom. What to make of that? I guess it means we are once more in a situation that can go either way: a further surge to 4660 or a drop to ~4000. Isn’t that always the case? Well, yes…
So, what’s with that garbage I mentioned earlier on? Well, more ingredients doesn’t necessarily mean we will cook better. Sometimes readers observe that my posts are rather minimalistic, just my lunar cycles stuff with a few indicators and my read on them. Why am I not mentioning VIX, margin debt or put/call ratio? What about the sunspots cycle, or Mercury retrograde? What about the Fed tapering? The reason is the “garbage in garbage out” principle:
* Broad market indicators like VIX, margin debt and put/call were found to be ineffective in a broad based study. See: Technical Market Indicators: An Overview
* Another big test of more than 5000 technical trading rules in a wide variety of market resulted in failure. See: Technical Analysis Around the World
* Sunspot cycles have not shown any consistent effect in the market, as you can see in my earlier article and in this study: Sunspot Cycle and Stock Returns. And because there are only 20 observed solar cycles, any results would suffer from the “law of small numbers” anyway.
* As for Mercury retrograde, it was found equally useless as you can read here: The myth of Mercury retrograde
Many traders tend to think that more tools, more news, more indicators or more newsletter subscriptions will make their trading more profitable. And there is a whole industry that banks on traders’ insatiable demand for more tools and advice. How about trying the opposite: throw out everything that is demonstrably garbage, and you may end up with something that works…