Question: “From a distance it seems that so many people are
now aware of a lot of technical indicators that they’re becoming obsolete, e.g.
seasonal trends, advance decline line, AAII polls. Do you agree?”
Answer: I view
technical indicators the way I would ANY indicator in life -- to be taken with
a grain of salt. The trick of properly using technical analysis is
knowing when the indicators are
likely to be valid and when they're not. This takes years of practical
experience and is just as much an intuition than it is a hard-and-fast rule.
To me, the most important aspect of financial market analysis are the
individual stock charts. I try to scan through at least 150-200 charts
per day of mostly NYSE stocks and ETFs. Doing this can give you a good
"feel" of what's really happening beneath the surface of the market
and is more valuable than relying on technical indicators, IMO.
Are the
indicators losing significance due to so many people using them? Not
necessarily, although this may be true at times. The A-D line has been
around forever and investors have always known about it. Sometimes it
works, sometimes it doesn't. It gives the best signals when it aligns
with other technical and sentiment indicators and charts. In other words,
a weight-of-evidence approach works best when it comes to indicators.
I would also
point out a favorite quote which I once read in a book on the Middle Ages by
historian Jonathan Riley-Smith. The quote was in reference to historical
models but it can easily be applied to analytical models in the financial
market as well: "Models invariably break down when the criteria for
them are applied too strictly." This is why technicians are
sometimes frustrated in their reliance on indicators; they're reading them too
literally and not giving enough weight to stock price momentum, which is the
single most important factor in most cases.
