Forum Archive Index - February 2003

[Travis Morien <travismorien@yahoo.com>]

--- Phaedrus <Phaedrus@techemail.com> wrote:
> Travis, 
>        You began by stating there was no evidence to
> support the concept of Support/Resistance. I gave
> some examples of it, and you now state "whether it
> exists or not, it is a virtually useless concept".
> Wrong. Consider the market dynamics that lie behind
> the CDI chart I posted. Many would-be sellers of CDI
> at prices above 23 cents will have capitulated over
> the course of 3 years, reducing their offer until
> they were able to sell. The longer the 23 cent
> resistance level is continued, the fewer the sellers
> in the price range above this level, leading to what
> I think of as a "partial vacuum" above the
> established resistance level. The same principle
> applies at Support - just beneath it is the same
> partial vacuum, a paucity of buyers. Keen buyers
> will have kept raising their bid until their order
> was eventually filled. This is why breakouts from
> previous support/resistance levels are often
> explosive. They burst through the "depletion zones"
> that lie just outside the support/resistance.

Perfect, so what you are saying is that you prefer to
operate in a stampede.  You'll only buy when there is
maximum buying interest, you'll only sell when the
majority of people are trying to sell.

Which usually means having to accept a large discount
when you wish to sell, and pay a large premium when
you wish to buy.  This is characteristic of technical
approaches - assuming they work.  If they don;t work,
that is of course not a problem.

>   You ask "What exactly are we supposed to *do* with
> this marvelous insight that stocks have support and
> resistance anyway?" This is a very surprising
> question coming from someone that claims to have a
> deep understanding of technical methods. If you are
> a seller of CDI, you know you have a reasonable
> chance of selling if you ask 23 cents. To try and
> get 24 cents - a price that has not been reached in
> years - would be foolishly optimistic. The chances
> of your order being executed are slim. Conversely,
> say you have come to the conclusion that CDI is
> undervalued, and want to buy. A commonsense, low
> risk entry point is at or just above previous
> support. It would be foolish to buy at the 23 cent
> resistance level, because if you have mistimed your
> entry (or, heaven forbid, made a mistake in your
> valuation!) you have bought at a high. Far better to
> pay a cent more, buying at 24 cents on the breakout,
> when (and only if) this occurs. 

The most successful investors have always been those
who take a position very different to the crowd. 
Buffett, Soros, Templeton, Neff, Rogers, Lynch, all
made their money by buying when selling pressure was
at its highest and selling when stocks were being most
fervently bought up.

Support and resistance have never been found in any
academic study, despite significant computer resources
being devoted to the task.  

Like Bigfoot and UFOs support and resistance is very
frequently seen and believed in by millions but rarely
photographed, and when it is developed the film shows
images that look indistinguishable from the charts
that finance lecturers have their students prepare for
the EMH lesson by flipping coins and recording the up
and downticks on chart paper.

>  You claim I require the benefit of hindsight. I
> repeat - where, exactly, do you see hindsight as
> having been used in the TLS chart? 

Are you making predictions about the future or
observing past events on a chart?  The comments I have
read, especially those about support and resistance
have tended to hinge on examples where it has shown up
in the past.  A more interesting exercise is
identifying such points ahead of time.  With proper
record keeping the incidence of support or resistance
holding is 50%, which is unfortunate because as Bill
Sharpe demonstrated to be profitable after costs
timing strategies need at least a 75% hit rate.
> 
> Another claim :- "Trend following systems have the
> fatal flaw that they result in very high
> turnover..." Nonsense! Take another look at the TLS
> chart that began this discussion - ONE trade in over
> 5 years! I have posted many charts of stocks in
> long-term uptrends, with the comment "it is all but
> impossible to beat buying and holding stocks that
> are in steady long-term uptrends like this". Anyone
> wishing to avoid the costs associated with more
> active trading can easily devise a system based on
> long-term trends that will signal very, very few
> transactions.

How many times is one faked in and out of these? 
Telstra has not gone straight down, there have been
numerous rallies along the way.  It was not at all
clear where the trend channel lines should be drawn
until the trend was well under way.
> 
>  "The normal course of the market is for trends not
> to exist. When a true trend is in progress it is
> likely that the majority of the movement will take
> place before it becomes apparant that this is a
> trend and not a retracement." Wrong. Look at the
> chart of any stock in a long-term uptrend - look at
> SKC, MHI etc. The uptrends were clearly evident long
> before any really big gains were made.

Tell me, prior to it falling to present levels, what
was the long term trend for CSL?  How much money would
one have lost waiting for the long term trend channel
to be violated?  At what price would one have bought
in in the first place?

And if it is all so easy to spot these trends in
advance without hindsight, tell me why you haven't
just programmed your Metastock or Tradestation Real
Time to use this very simple trend following system
and trade automatically?

The trends are unambiguous, apparantly work more than
50% of the time and do not generate high turnover
which means they generate a singal buy/sell signal and
not a series of whipsaws.  It should be a simple
matter to program a computer to do this.  

What's stopping you?


> 
> "What good is a system that indicates nothing in
> advance?" It will tell you when a stock begins a
> trend. It will tell you when a trend ends. It will
> tell you if a trend is strengthening or weakening.
> It helps you gauge the significance of any move, by
> relating it to the volume traded. It will identify
> stocks that are trendless. The use of indicators
> such as oscillators can provide excellent entry and
> exit signals for stocks that you have decided to buy
> or sell on the basis of value analysis. You do not
> have to be able to see into the future in order to
> trade effectively. I am unaware of ANY system that
> reliably indicates anything in advance.

It won't tell you when the trend ends, it will give a
late signal.  As useful as "that was the turnoff" from
one's wife while you've just sailed past it in the
right lane at 100kmh.

Once again, these volume indicators are obviously very
clear and not at all obscure and subjective, their hit
rate must be high or else you wouldn't advocate them
and they must give few bad signals.  Why won't
computers find these patterns?

The question I always ask techies is how come TA is so
simple and reliable as a mechanical system when a
human uses it, but try as they might traders just
can't seem to figure out how to program a computer to
do this.

I have a science background, one of the things I'm
keen on as a weird science type is that experiments
must be repeatable.  TA lacks repeatability it is
entirely subjective and as such vulnerable to such
things as confirmation bias and overconfidence.
> 
>  Why would I look at buying TLS in the event of a
> trendline break? Because it could mean the end of
> the downtrend. It could be the beginning of an
> uptrend. It would put this stock on my radar screen,
> and I would therefore look into the fundamentals of
> the stock. You may perhaps think that I eschew
> fundamental analysis. I do not.

You wouldn't maybe turn this around and determine a
fair price before the trend turns around, so you'll be
prepared?

I'd be very interested to know how you value a
company.  The concept of investment relies on buying
assets as cheaply as possible, speculation usually
rides on the assumption that something is good buying
if it is more expensive and offers an inferior yield
to the yield offered earlier.  Successful investment
relies to a large extent on suppressing speculative
urges.

I can't name a successful investor with a public
record that has used TA with any success.  Come to
think of it, there aren't too many people who one can
name that he been successful traders using TA, as you
describe it.

Where is the Buffett, Soros, Templeton, Neff or Lynch
that used TA to any great extent?

"Eventually, all traders lose money" - Jesse
Livermore.

> 
> "How will you know if the upward break is not just a
> false signal?" When (if) the upward price action
> continues, and the stock goes into an uptrend.

after the fact you mean, long after the purchase will
you have any idea if there was a valid buy signal. 
Or, if you wait until the "confirmation" what do you
then do if the stock falls back?

I know the answers to these, but i have great trouble
reconciling the whipsawing reality of technical
analysis in real time with your claim that turnover is
really low.
> 
> ".....and how will you estimate your future profit?"
> There are many technical and fundamental methods,
> but they are a waste of time. I cannot know in
> advance what my future profits will be. Neither can
> you. You can estimate your little heart out, but
> when push comes to shove, you can only take what the
> market gives you.

So how do you know, when you have several
opportunities, which one to go for?

Traders love to talk about risk/reward ratios, but
I've never seen a single non-glib comment on how to
calculate them.

>   So, you got out of TLS "pretty much at the peak,
> aeons ago." Well done. You further state "The stock
> was overvalued long before it got to those levels.
> Telstra had ceased to be an investment and quickly
> became a speculation only a short time after it was
> floated." One can therefore presume that this was a
> technical exit, since a fundamental investor would
> have exited only a short time after the float - thus
> missing out on most of the 250% return that you got
> in a single year. You claim that "valuation
> approaches gave an earlier and more reliable
> signal." Huh? Even if this point were conceded (!)
> surely the most important issue is which approach
> gave the most profitable trades. No contest in this
> particular example. This spectacularly successful
> technical trade would have been largely missed by
> anyone whose exit was triggered when TLS became
> "fundamentally overvalued" or "speculative".

That goes with the territory.  Value investors missed
out on all the profits from buying Dot Coms in the
late 90s.  They still have their capital though,
unlike many.

The trend was quite obviously over in 2000 but people
still lost almost everything.  Why?

>  "Support and resistance levels rarely ever coincide
> with levels of intrinsic under and overvaluation." I
> agree. My experience is that stocks that are
> trending generally overshoot well past their fair
> valuations. To me it makes good sense to buy
> undervalued stocks at or near support and sell
> overvalued stocks at or near resistance. Valuations
> are only personal estimations, based on whatever
> information is available in the public domain.
> Support and resistance levels are set by the market.
> They are therefore of much greater import. I am
> often wrong, the market - never. It is also bigger
> than me, so I don't argue with it.

valuations are surprisingly simple.  They work really
well because only a small fraction of people use them.
 Everyone knows in their heart of heart that Warren
Buffett has been a much more successful investor than
they have and they appreciate that this is a "better"
way to do things in terms of risk and reward, but even
so they choose not to because they believe, despite
all evidence and logic to the contrary that they can
do much better than Buffett by using the same trend
following systems that 95% of the market are using.  

To believe that you are going to achieve superior
returns to the bulk of market participants by using
the same techniques is a bit crazy, to say the least.

> ".. if you really can achieve a return *double that
> of the market, for extended periods of time* then
> you shouldn't be mucking around here - go apply for
> a job with the Quantum fund..." Where did you get
> this "quote" from? I have never made any such claim.
> In any case, I do not want or need a job. So long as
> my trading profits more than sustain my chosen
> lifestyle (as they have for many years) I am
> content.

I'm quoting me... my calculation shows that after tax
and making reasonable (though perhaps too low)
estimates of trading expenses including brokerage and
bid/ask spreads that you'd need to achieve about 17%
as an intrayear trader, before tax and costs, to get
the same return as a 10% buy and hold investor with a
5 year holding period.

This is a result of CGT discounting for 12 month+
holding periods and the lower trading expenses.
> 
>  Travis, it is good that you have found an
> investment system that is profitable and suits you.
> Just don't make the mistake of thinking that your
> current approach is the only one that works.

It is the only valid *investment* system.  You can't
invest without an understanding of value and you
wouldn't invest unless you figured the asset was good
value at that price.

"Investment" being defined as that activity where you
purchase assets deemed by you to represent good value
for money, and "speculation" being that activity where
you wish to gamble on market fluctuations.
 
>   You did make one very pertinent statement :-
> "Successful traders use money management and risk
> management systems designed to work for their trend
> following or reversal systems." I agree with this
> completely. Have you ever considered the possibility
> that your failure as a trader was caused by poor
> money management/risk management systems? I mention
> this because it sounds to me as though you were
> wiped out by a single really bad trade. ("I was
> profitable as a trader, it worked while I was at it,
> at least until the point where I bought index put
> options just before the bear market began")

I was not a failure as a trader.  In a 12 month period
that was my *only* losing trade.  Maybe I was just
lucky.  I was aware of money management principles, I
had only a small amount in that trade and in the
grander scheme of things while I learned many lessons
from it it wasn't a particularly devastating blow.  In
the time since then I dropped trading altogether and
found that investing in undervalued shares was a lot
more profitable and less risky, especially after tax.

>  Travis, as much as I enjoy a good discussion, I
> will not be continuing this thread. I have in the
> past spent (wasted) far too much time on people who
> think there is only one way to skin a cat. Their
> way.

I'm happy for you, knowing that by using the same
technique employed by 95% of market participants
you'll be able to achieve a return superior to nearly
that many.

For trading to make sense financially you need to be
enormously profitable before tax because after tax
you'll be penalised tremendously.

I call on evidence such as Terry Odean's studies of
small investors at discount brokerages that show that
the ihgher the turnover the worse you do, and the only
group that actually beat the market after costs
happened to be the ultra-long term buy and hold types.

I refer to the Hyonymous study of futures traders,
again complete devastation to all the traders.  Dalbar
Inc studied US mutual fund investors and found that
most investors pull out after a fall and put money in
after a rise (trend followers) and as a result from
1984 to 2000 they underperformed the S&P500 by nearly
10%pa.  (that one is shown in
www.travismorien.com/investment.ppt)

Every study ever performed on the subject has shown
that traders do much worse than buy and hold
investors, and that this is a direct result of their
buy high sell low trend following.  

No evidence has ever been produced by a credible
source that TA works at all, on the contrary many
detailed studies exist that debunk various TA methods.

The failure of black box trading packages is also
strong evidence against TA.  TA exponents never admit
that their method is entirely subjective yet objective
analysis fails to find any evidence for it.

But don't let that put anyone off.  8)

Travis
www.travismorien.com


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