Technical Analysis is financial astrology. There are too many variables whose importance changes too quickly to allow any mathematical formula to accurately predict the performance of the Market. It's like Science claiming that it could predict the crystal structure of the next snowflake when there are an infinite variety of potential snowflakes. It's simply impossible.
It's true that the economy operates in cycles. It's easy to identify historic economic cycles and discover the primary reasons that each one occurred. However, to extrapolate from the existence of economic cycles to Technical Analysis is like noting the fact that people and objects don't fall off the earth and assuming that the earth is flat.
Fundamental Analysis might work in an honest society using objective evaluation tools and operating in a stable reality. Enron and WorldCom are just two examples of hundred of thousands of examples that show honesty in business is a rarity. Business audits aren't objective. The Generally Accepted Accounting Principles (GAAP) have more loopholes than a sponge has pores. Today, the world economy is anything but a stable reality. We are walking along an unstable cliff that will soon plunge us into a Recession and eventually into a major Depression. Many fundamentally sound businesses will be swept away in this economic collapse.
The Machiavellians are economic cynics. They argue that the economy and all aspects of human life are manipulated. There are hundreds of thousands of groups who want the public to act in some specific way and to get them to do so; the manipulators create a perception that ensures the desired reaction. A specific breakfast cereal is good for you because it is eaten by a sports figure. A name brand drug is superior to its less expensive generic equivalent because you have heard of the name brand company. Statistics that the manipulator has created prove that the perception the manipulator wants you to believe is true. Everyone faces a daily barrage of misinformation that is intended to create a false perception that will elicit a desired reaction. This starts with your kids manipulating you in the morning and, just before you go to bed, ends with the late night news telling you the Government projects a lower inflation rate.
Governments are the world's major manipulators. The primary purpose of any Government's manipulation is to create an illusion of well being among its citizens. The North Korean government no doubt has some of its citizens convinced that they are living in a "Workers' Paradise." As a government gets its citizens to wear rose colored glasses, they act in ways that help the government enhance the national economic illusion. If a government projects a positive economic picture, people buy products and services and the economy improves temporally. If the government keeps mortgage rates below inflation rates, more people buy houses and there is a construction boom. People act upon their perceptions and not upon the underlying reality.
Societies act upon their social and economic perceptions, until those perceptions collide with economic reality. It's the major collisions between the economic illusion and reality that creates economic cycles. Meanwhile, for those who can see the illusion, there are always opportunities to profit from the vision. From the OTC to the NYSE, the stock market is a world of pure illusion. If you see the difference between the Market's reality and the public illusion, you can consistently win by speculating in stocks. If you realize that advertising is hype, you read labels at the Supermarket. If you know that Government statistics are biased, you find the formula that has them better reflect the underlying reality. If you hear the Voice in the Wilderness that claims that economic salvation is gold ownership, you read economic history and realize that gold is a false god.
You don't have to be a Machiavellian to realize the need to question everything people want you to believe. If you act upon perceptions, you will eventually be a loser in the game of life. If any decision is important to you, check out the information before you act upon it.
Article Tags: Economic Cycles
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ABOUT THE AUTHOR
He has been the Managing Director of Beowulf Investments http://home.earthlink.net/~beowulfinvestments/ since 1981 and is the Executive Director of the Global Village Investment Club http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/