Technical Analysis
Here I'll discuss when/if technical analysis is helpful. It's a pretty controversial technique from what I've heard so far; some people call it total garbage, other people say it can be somewhat useful at times, and still other people rely entirely on it.
Definitions of Technical Analysis:
Wikipedia: "Technical analysis is [a] security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume."
Barron's Dictionary of Finance and Investment Terms: "[Technical analysis is] research into the demand and supply for securities, options, mutual funds, and commodities based on trading volume and price studies. Technical analysts use charts or computer programs to identify and project price trends in a market, security, fund, or futures contract. Most analysis is done for the short- or intermediate-term, but some technicians also predict long-term cycles based on charts and other data. Unlike fundamental analysis, technical analysis is not concerned with the financial position of a company.
Misc Thoughts
It seems like there may be a spectrum between technical analysis and fundamental analysis. For example, if you know someone who buys whatever he hears Warren Buffett has bought, but never looks into the fundamentals of the company himself, what would you call that? It seems like it could be TA that's right on the border with fundamental analysis, because you can trust that Buffett has a good fundamental understanding of the company. But it doesn't seem like it's exactly the same as fundamental analysis, because you aren't gathering actual information about the fundamentals of the company (sales, pricing power, debt, etc.). It's also not exactly the same as the definitions of TA given above, because you're not using past price and volume to determine your decision.
Jesse Livermore
If you read Reminiscences of a Stock Operator, technical analysis is all that Livermore was using for years. I found that incredible given today's total flip (where all you hear about on the news is fundamental analysis). [Later: Actually, it seems there was at least one crucial difference between what Livermore was doing and what most chartists do, which is that Livermore would buy and sell big blocks of stock to "feel out" the market by seeing how quickly stock could be bought/sold and how much it caused the price to move.]
Michael Burry
Burry on his use of TA in 2001:
As for when to buy, I mix some barebones technical analysis into my strategy -- a tool held over from my days as a commodities trader. Nothing fancy. But I prefer to buy within 10% to 15% of a 52-week low that has shown itself to offer some price support. That's the contrarian part of me. And if a stock -- other than the rare birds discussed above -- breaks to a new low, in most cases I cut the loss. That's the practical part. I balance the fact that I am fundamentally turning my back on potentially greater value with the fact that since implementing this rule I haven't had a single misfortune blow up my entire portfolio.
I do not view fundamental analysis as infallible. Rather, I see it [Ed. - TA?] as a way of putting the odds on my side. I am a firm believer that it is a dog eat dog world out there. And while I do not acknowledge market efficiency, I do not believe the market is perfectly inefficient either. Insiders leak information. Analysts distribute illegal tidbits to a select few. And the stock price can sometimes reflect the latest information before I, as a fundamental analyst, catch on. I might even make an error. Hey, I admit it. But I don't let it kill my returns. I'm just not that stubborn.
I am selling London Pacific Group at the market open because of something I call the “5 to 3” effect. Illiquid stocks falling beneath 5 often fall much further because of margin calls that kick in in the 3-5 price range. Forced selling in illiquid stocks is a recipe for price risk, so I have found it prudent to get out of stocks as they cross below 5. It is a very rare case that I pay attention to absolute share prices, but this is one of them.
Hugh Hendry
2011 LSE AIC Conference - http://www.youtube.com/watch?v=RIb3wIePclo
- 44:26 - he seems to admit to using a type of technical analysis:
[Context: Immediately before this quote he had described a situation in which one of his analysts recommended a pharmaceutical company based on its fundamentals, but it then issued a profit warning and the stock fell 40%.] In some respects, I go around and I don't wanna know [about the fundamentals of companies]; I don't wanna do stock research. I want to have that itch--that trepidation--that says, "I don't know the complete picture here." And therefore I watch things like a hawk, and if the chart breaks down: I trade, I sell.