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* Paper written by André Gosselin published in the "Disnat" bulletin.
Technical analysis never had very good press
among the economists, and even less among the professors of finance of
our universities. The book which, since a quarter of a century, had hurt
the most the technical analysis is indisputably the one written by the
Princeton University professor, Burton Malkiel, named A Random Walk
Down Wall Street.
For more than 25 years, this best-seller of the
financial literature (it is now the 8th edition) has defended with
eagerness the idea that it is impossible to beat market over the long
term, would it be with the assistance of the fundamental analysis or the
technical analysis.
If the fundamental approach is essential to
evaluate properly the securities, Malkiel says, it is not the same with
the technical analysis. Not only this approach does not allow the
investor to retain interesting gains, but on top of that it does not have
any utility for the correct operation of the financial markets. To summary,
it is pollution in all respects.
The price sequence of an index or any security,
he says, does not provide sufficient information to beat the market.
These prices are under the influence of so many and varied factors that
it is impossible to claim that they contain their own logic in itself.
In 1999, two professors of MIT, Andrew Lo and
Craig MacKinlay, have published a book which goes in the opposite
direction than Malkiel's. Its title: A Non-Random Walk Down Wall
Street. The two researchers of MIT draw up a portrait much more
positive and scientist of the technical analysis.
Their report is clear: it is possible to
generate yields higher than the market average when the technical
analysis is adequately used, as price trend analysis and chart patterns
(head and shoulders formation, triangles, etc...).
Before the works of Lo and MacKinlay, the
scientific study of the technical analysis was facing serious problems.
How to check an investment technique which results mainly from art, the
personal judgement and the interpretation of stock exchange charts by the
analyst? The challenge of the researchers has consisted in finding a
methodology able to detect, using optical readers and data-processing
software, the patterns and geometrical figures to model them.
Well, it is now done. It is now possible to test
the value of the technical analysis with the same instruments which are
used for the recognition of the fingerprints or the identikits. The
technical analysis can finally be examined over long periods, no matter
how many securities and graphs.
Thanks to Lo and MacKinlay, it is now known that
several tools and rules of the technical analysis make it possible to the
investors to generate what is called, in financial language,
over performing yields, higher than the average.
Does that mean that the technical analysts
obtain better results that the other types of investors? I don't think
so. It takes a lot of discipline and rigour to get benefits from the
technical analysis. And that is what the majority of those who are
attracted by this investment approach are really short of.
André Gosselin
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