I finished my academic stage at a university in Reus, skipping tax law classes to photocopy stacks of ‘Expansion’ copies. I filled the shelves in my room with reports and papers that were ultimately useless. I compiled them with so much hope and emotion that I remember it as if it were yesterday. Naivety intact.
My life is light years away from those days, when I was approaching graphics, encouraged by that teacher who makes you fall in love with his subject. Antonio Rodríguez. I do not remember the name of any other of all those who, without any guilt, They tried in vain to instill in me some knowledge.
But Antonio Rodríguez also did not know exactly where that technical analysis was going. Things from the source. I understand that there are trained and competent people who affirm that it is useless, it’s time to unmask it. The reality is that technical analysis is not the crystal ball that its most fervent Taliban believe they have in their hands, but neither is it the homeopathic solution that its detractors dismiss it as. These ‘haters’ cannot be blamed too much, given the work done by so many technical analysts.
Good part of the economic press He has been making frankly better use of the charts all his life. Read them to each other, when technical analysis is concerned, is wanting to die of a heart attack. If something that just improves passive management a little bit in terms of the risk / benefit equation is done wrong, then it becomes homeopathy.
Last weekend, something as absurd as the following was published in the leader of the Spanish economic dam: “The Dax 30 in Frankfurt is setting new all-time highs after rising more than 1,000 points, and the EuroStoxx 50, which rises like a rocket, is already less than 1,500 points from its HISTORICAL highs “.
so, ¿what’s wrong about it? Well everything. In a few lines, the complete ignorance of technical analysts on how you should talk about ‘charts’. And of course, how the graphics should be used. A few years ago, Planeta invited me to write a book on the subject, which I dared to publish only because I consider it regrettable how we approach it. I was quite ashamed to talk about something so hackneyed, so I accepted just to introduce a problem that all the economic headers seem to be unaware of.
In a few lines, the complete ignorance of technical analysts about how to talk about ‘charts’ is shown
The first has to do with the scales of the graphs. The text tells us that the EuroStoxx 50 is to 1,500 points from its all-time high. And what does that mean? Its alot? Is it little? Because raising 1,500 points if you are at 100,000 is nothing and if you are at 5,000 it is a world. This reflects the cognition problem of technicians, capable of using arithmetic scales. Said in Christian: they give the same graphic importance to a movement of 1 dollar when you are trading at 10 dollars as when you are trading at 2,000. Put the number you want. This mathematical absurdity happens hundreds of thousands of times a day even though it can be corrected, forever, with a couple of clicks.
This, being serious, is less so than speaking in them German Dax and EuroStoxx 50 terms. The first is a ‘total return’ index, an index that adjusts among other things the dividend, reinvesting it in it. The second, like most indexes, does not. And of course, it seems to you that the EuroStoxx 50 has a lot of gear left because it is 1,500 points from its maximums and shooting like crazy. Obviously, the EuroStoxx 50 ‘total return’ exists as well and, as can be seen from the chart below, is well above its all-time highs. But some technical analysts seem not to know.
How are you going to relate where a GP bike and a GP3 bike are, even though they came out at the same time? How are you going to relate a EuroStoxx50 (‘price return’), or a Ibex35 (‘price return’), with a Dax 30 (‘total return’)? How are you going to do it talking about an all-time high that was marked 20 years ago with that of dividends that have been paid and eventually reinvested in the index? The photo that is obtained from either path places us in front of two completely different worlds. Obviously, if you want to show something coherent, you cannot speak in base ten in one part of a text and in base two in the second. In fact, indices that do not adjust dividends are not comparable to each other because some pay more and others less.
If the data is not normalized, they cannot be compared. Anyone with minimal knowledge of data usage knows this. Otherwise, it may appear to you that the Dax 30 does very well and that the EuroStoxx 50 leaves much to be desired as an investment. And of the Ibex 35, of course, you don’t even want to talk because it makes you want to cry. Obviously, you can normalize the data to make it comparable.
There is really only one, and we do not stay the same distance from it if we use a ‘total return’ approach or a ‘price return’ approach. Reality, by definition, is forbidden to us. We may never have the necessary tools to know it completely, but being at a greater or lesser distance from it is something that depends only on us and the tools we use. While physicists search for refutations of the standard model because they know there are things that escape it, a host of technical analysts follows. using the same graphics that Charles Dow used, ignoring the vast majority of what they do, which is not the study of prices but of market action.
A plethora of technical analysts continue to use the same charts that Charles Dow used, ignoring what they do
No, dear friends, the EuroStoxx50 is not 1,500 points from its all-time high. No, at least, if you are talking about an index that you can handle at the same level as the Dax 30. And that of the Dax 30, being ‘total return’, is between the two a better level to approach the market action according to the tools available to the common technical analyst. For an analyst to indulge in such contempt for intelligence for decades, as happens in the dean of the press economical Spanish, it’s ridiculous.
PS: the book I wrote is called ‘Fundamentals of technical analysis’. If you do get it at some point, don’t expect a straight line to the money. It is only a place of access, a first step, to establish a capital protection system that helps make your money profitable in the long term by protecting capital as much as possible. But it is the necessary step not to get lost on the road of technical analysis for years, to avoid the labyrinth it ends up becoming if you focus it so far from reality. The benefit of the book if you own Fundela, the Carlos Matallanas foundation created to combat ALS, that terrible disease that he fought so bravely until the end of his days. Death is not the end, his example is still present.