Save time by listening to our audio articles as you multitaskTheir methods are many, varied and wackily named. A “death cross” is when a short-term moving average of an asset’s price falls below a long-term moving average. “Fibonacci retracement levels” rely on the idea that an asset climbing in price will fall back before rising again. Such backsliding is supposed to stop at levels based on Fibonacci numbers, like a 61.8% drop.
Plenty of mainstream investors use some version of trend-following. Factor investing, invented by Eugene Fama, the Nobel prize-winning economist, and Kenneth French, is used by successful quantitative funds, likeCapital Management. It breaks down returns into component factors like “size” or “quality” . Another such factor is momentum: stocks that are rising tend to keep rising. Still, their approach is a little more sophisticated than looking at a price chart.
It is nevertheless possible to understand the chartists’ obsession with levels and trends. There is no real difference between a euro being worth $1.0001 or $0.9999, but these “big figures” in foreign-exchange markets assume importance. This is in part symbolic and in part practical: clients tend to place orders near round numbers and derivatives tend to be sold with round “strike prices”. That means it will take a lot more activity for the euro to fall from $1.0001 to $0.
Perhaps the real value of technical analysis is what its use tells you about market conditions. No one bothers with the chartists’ pretty drawings when the economy is good, profits are high and stocks are moving smoothly higher—nor, indeed, in the depths of a frantic bear market, when prices will plunge through any and all levels technical analysts are wont to draw.
That some are laying the blame for the end of the summer rally on a technical tripwire suggests they have little idea what is really going on. Perhaps Buttonwood should derive a technical indicator of her own: the more regularly chartist analysis lands in her inbox, the clearer it is that no one has any clue as to why the markets are moving.An earlier version of this article said Eugene Fama and Kenneth French won the Nobel prize for their work on factor investing. They did not.
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