Saturday, June 13, 2009

Book: Predict Market Swings with Technical analysis

by Micheal McDonald (2002).

Worth reading, probably only worth buying unless you are interested in trend following and timing the market indices.
  • Believes in market timing. focus on the book is predictive the market as a whole
  • Gives his mental model of the market: long term based on fundamentals, short term series of unpredictable feedback loops.
  • From his study, these 'emotion driven' feedback loops can cause price movements of up to 25% or more, for no pressing economic reason. Maximum of 13 weeks max in a decline, 26 weeks (6 months) for an advance, possibly followed by 3 months stabilization.
  • Based on these time periods, he uses 132day and 72 day MAs for market timing with good results. Then tries to combine them: takes the average of these 2 MAs, (i.e.: buy when market breaks above this average, sell when it breaks below it). Interesting idea if you want to try trend following.
  • Gives some simple scientific reasons/analogies showing why the market is sometimes predictable and sometimes unpredictable. (e.g.: card counting in a blackjack game).
  • Believes Elliot Wave theory works only sometimes when the market is predictable. Actually, I think this is true of all Fundamental/Technical analysis.

The current rally, from mid-Mar, is now 3 months old....

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