TA of individual stocks is pointless

Discussion in 'Technical Analysis' started by shark, Jun 2, 2010.

  1. shark


    The market in general moves as a whole, down to the minute level. What this means is that any technical analysis that applies only to an individual stock has no value.

    If you overlay the intraday charts of any two S&P500 stocks, you will see that they are highly positively correlated. Any negative correlations are short lived, unless a major event happens that affects only one of the stocks. This is unlikely, as a major shift in the price of IBM, for example, will definitely affect the whole market. Thus, we can conclude that any negative correlations on the chart are simply unpredictable, random noise.

    This positive correlation, to me, provides strong evidence that the bulk of TA is fruitless. We can go through individual technical indicators to show how they have no real-world foundation.

    Closing of the gap: Because the market moves as a whole, an individual stock has absolutely no reason or ability to close it's own gap. Gaps are only closed when the general market moves in that direction, for completely different reasons.

    Most trendlines: Any trendline that neatly connects the highs or lows of an individual stock is an illusion. One could draw generally the same line on 500 other stocks, but some of these lines will be curved, have a different slope, or be generally ugly.

    Volume: The volume formation on a particular stock will be roughly similar to every other stock at the same time. Any differences between the volume patterns of the two stocks are just noise.

    Head and Shoulders: The neckline on a head and shoulders pattern is far too precise to have meaning. The market likes to be "fuzzy" in a way; it rarely reverses at an exact point because the differences between S&P500 stock A and stock B are simply noise.

    Range & Channel breakouts: A nice, neat range breakout could appear on the chart for a particular stock, but it might be nonexistent for 500 other similar stocks.

    Support and Resistance: Individual stocks cannot have meaningful support and resistance, because the market moves as a whole. The only real S&R is that which exists for the market as a whole.

    Yesterday's H/L/C: These points are absolutely worthless in serving as support and resistance. They are arbitrary and have no meaning for the whole market.
    I am not saying that technical analysis does not work. My point is only that TA traders need to be able to distinguish noise from real substance in the market. The biggest trap one can fall into is to start seeing something that is not there. If you are trading an S&P500 stock, only pay attention to price moves that are also apparent in the average itself. Any negative correlation is the accumulation of random trades placed by random people at random time periods.

    TL,DR: Every stock in the SP500 is highly positively correlated. Negative correlations are almost always noise. A price/volume pattern that has meaning and is not noise should be apparent on almost all stocks collectively.

    Please correct me if i'm wrong. :D
  2. So you're saying that a certain method or methods don't work.


    Bring something constructive to the party. We have enough of general This doesn't work and That doesn't work. Give details. Show graphs where it breaks down.

    The Fibonacci Lines are Voodoo thread was interesting because the threadstarter came up with a little strategy designed to debunk Fib lines. I felt his strat was flawed, and it was a wonderfully fruitful discussion.

    So take your blanket dismissals and be gone. Or come back with some specifics and we will be happy to engage you. We all just might learn something.
  3. You are right!!

    First of all S&R are zones not squiggly lines. This is proven by volume histograms. You will never see super high volume at one price, but always in some zone at multiple prices that are bunched together.

    This means it hard to trade patterns, as those assume S&R are lines not zones. Look at how people got killed shorting the H&S in august 2009.

    Furthermore while people think Fibonacci works, it does work, but not because they are golden ratios. Its because market tends to trend. No matter where you buy a pullback, it is likely to continue to trend. I've noticed people are more succesfull if they define a fibonacci zone, instead of a fibonacci line, where they buy the pullback.

    I also agree that stocks tend to be highly correlated to the index. However there will always be that one exception where in the daily charts stocks dont follow the index. if that is so stocks tend to be uncorrelated to the market if the market doesnt trend heavily. So you cant say all stocks follow the market.
  4. Wow, I have a guy in my office that intraday trades a basket of the top 100 stocks by volume with a $500K account, uses nothing but a chart and has averaged $1.5K in daily profits for the last couple years. Now I have to tell him that what he does has no value.

    (Stocks are not my cup of tea. I like futures)
  5. Arcanine


    So the point of the OP isn't that TA is bunk, it's that you're no better off using TA on the stock itself than if you did it on the appropriate index. Correct?

    If so, then why shouldn't a trader use TA on the stocks he/she plans to trade? If price moves in the stock reflect price moves in the index and vice versa (for the most part), then what difference does it make which one you use TA on? TA helps determine entry and exit points, and you'd need to see the price of the actual stock itself for that, wouldn't you?
  6. Shark; If what you state above is true then you should be able to come up with a strategy that takes advantage of it.:)
  7. If this were the case then when it rains in the county all farms gets the exact same amount of rain.

    Every stock moves and acts uniquely to its own market environment.
  8. Div_Arb


    Your assumption is incorrect. Doing a quick scan of S&P 500 companies, whose beta is less than 0.5 revelas names like GENZ, ABT, XOM, WMT, GIS, ADM. This means that less than half of these stocks movement is explained by the S&P 500.
  9. If you are talking to me it isn't an assumption.

    Please show me one single unique stock that exactly tracks the S&P.
  10. shark


    Ok ill try to make my point clearer. Due to the fact that most stocks tend to reverse their trends at the same time, we can say that this price action occurs for the exact same reason in each stock. Whatever is happening in the market to cause traders to sell in stock A, is also affecting stock B to a great degree.

    What this means is that any sort of technical analysis that ONLY applies to stock A is absolutely worthless. You can draw hundreds of different looking patterns/trendlines in hundreds of different stocks for the same time period, but it's still the same general market move. If you're going to draw a trendline for stock A, be aware that in reality it's very "fuzzy". Exact price points have no meaning.

    Attached is an overlay of IBM and SPY. I'll be back in like 2 hours.
    #10     Jun 2, 2010