The McClellan Oscillator
Chart Interpretation

More on How NOT To Use Indicators

The assault on technical analysis continues, from people who do not understand it and do not care to take time to learn how to do things properly.  I wrote previously about a blogger who likes to write dismissive articles about technical analysis indicators, using them badly and (predictably) getting bad results.

The latest example of a clueless criticism of the practitioners of technical analysis comes in a Bloomberg article, which is somewhat curious since Bloomberg makes millions of dollars selling subscriptions to its data platform, which offers clients all sorts of technical data, indicators, and other tools.  It is a bit of a paradox that Bloomberg would sell such products, and at the same time criticize the people who use them.

In this article, reporter Whitney Kisling writes under the headline, "Technical Analysis Fails as Money-Making Strategy for Stocks, Birinyi Says".  The story covers a research report by Laszlo Birinyi, who runs the research firm Birinyi Associates Inc.  The article then goes on to specifically criticize the Advance-Decline Line for its supposed failures as a predictive tool, noting how it "failed" in late 1998.

It is too bad that the reporter (or Birinyi, it's not clear) did not even get the facts right.  The NYSE A-D Line topped April 3, 1998, not in November 1998 as the article states.  Unfortunately there is no link in the article to the actual report on which the story was based, so we cannot know whether Birinyi screwed up or the reporter did. 

Furthermore, the fact that the A-D Line did not accompany the big-cap indices higher in 1999 was extraordinarily important information.  It conveyed the message that there were huge liquidity problems underlying the tech bubble, which an examination of the SP500 or Nasdaq Comp would not reveal.  The gains in those indices were being made by only a few of their component issues, and the rest of the market was having trouble.  Formerly high-flying tech stocks were already going bankrupt in 1999, which the uptrend in the big cap price indices did not reveal.

It is true that if someone had used ONLY the A-D Line in 1999 as a trading signal, then he could have missed a big rally.  But I do not know of any reputable technical analyst who ever uses only a single indicator to the exclusion of others.  So when the reporter claims that, "Analysts who use patterns in price and volume charts to forecast gains or losses in the stock market fail to make investors money," she is making an unjustifiably defamatory statement that is not supported by the evidence she offers in the article, evidence which is itself flawed.


And as for the A-D Line not being predictive, I guess the divergence ahead of the 1998 bear market which was the subject of the "Missing The Rally" portion of the article does not count as a prediction to Mr. Birinyi.  And I guess that the A-D Line high in June 2007 ahead of the price high in October 2007 was not really predictive of anything either.  But I know a lot of people who actually know how to use such tools correctly, and who saved themselves a big loss of wealth by paying attention to the A-D Line divergence in 2007.

The A-D Line also flashed an important divergence in August 1987, 2 months ahead of the October 19, 1987 crash.

Divergences like this are a very important aspect of analyzing the A-D Line, but there is far more information there for those who know how to access it.  Sherman and Marian McClellan developed the McClellan Oscillator and the McClellan Summation Index back in 1969 so that they could analyze the acceleration taking place in the A-D data, and not just the raw position of the A-D Line.  Those indicators continue to be extraordinarily useful even in today's stock market.

Using any tool correctly is important.  The fact that Mr. Birinyi has found ways to use the A-D Line to get bad results is not proof that someone else is unable to find ways to use it to good results.  So he should not go around claiming that "technical analysis fails" just because of finding one wrong way to use a tool.

Perhaps Mr. Birinyi is having trouble accepting the fact that the A-D Line has already moved to new all-time highs, while the big-cap price indices have not yet equaled that feat.  That is a message that liquidity is plentiful.  A lot of people are having trouble accepting that bullish news, so perhaps this is why he has decided to lash out against the work of other analysts.

But if Birinyi were a professional, he would not disparage the work of others with such a flimsy basis.  There are organizations of professionals in the field of technical analysis, such as the Market Technicians Association (MTA) and the American Association of Professional Technical Analysts (AAPTA).  Members of both groups are bound by codes of ethics, which prohibit members from making such baseless accusations that defame the work of others.  It says a lot about Mr. Birinyi that he is not a member of either group.

 

Tom McClellan
Editor, The McClellan Market Report
Member of MTA and AAPTA