Adventures in Technical Analysis, Jim Cramer Edition

If you like seeing Jim Cramer get his comeuppance, you'll love this video. It's a bit long, but basically on Friday June 13, Cramer told his viewers to "buy buy buy" banks, homebuilders, etc, on the strength of something called an "oscillator". One week later, those stocks had been hit hard, and he told his viewers that if they owned banks, homebuilders, etc, then he couldn't help them, because

"If you own any of them, well, you obviously are like the golem: 'I'm not listening, I'm not listening'. You're not listening to the show."

There are two things we can learn from this, besides the obvious one that Cramer has the memory of a goldfish and no one should ever listen to him. The first is that he knows nothing of Jewish folklore. The second is that stock traders don't know anything.

It's not just Cramer, is the point. They all do it: even much smarter and much more analytical traders like Barry Ritholtz do it too. Do what? Resort to "technical analysis", which is the art of drawing lines on charts and extrapolating from them what the market is going to do next.

Whenever you hear words like "overbought" or "oversold" or "momentum" or "support" or "resistance", it means that whatever you're hearing is garbage. But it also means that the person you're listening to has no idea what's about to happen, and is therefore resorting to the financial equivalent of astrology. In such cases, it's worth ignoring the message completely, but it's also worth having some serious thoughts about the messenger, too.

If you don't have any bright ideas about which way the market is going, there are two roads you can take. The smart and sensible route is to say "I don't have any bright ideas about which way the market is going". The dumb route is to get out your charts and start making predictions on the strength of technical analysis. So the next time you see someone doing that, ask yourself why they don't simply admit that they don't know. It would be much more honest, and much more useful.

(HT: Tilson)