Technical Analysis: Can You Really Predict?

In specific let’s look at the chart from February.

Let’s compare that to the actual S&P chart.

The black arrow on the S&P is the time when I wrote the blog entry that made the prediction. Compare the prediction to the actual and what you see is a correlation that is pretty much on the money. The first major dip is a bit lower than what was predicted. The major peak was pretty much on the money. The next dip was pretty much on the money, and the sharp pullback was matched, yet the peak was a bit lower than predicted. The pullback from the next peak was a bit lower, but the market moved up again.

What this is telling me is that technical analysis like “draw a crayon” trend analysis is outdated. For my own personal purposes I as a test applied technical analysis in the classical approach and the new approach for the EUR and USD pair. The 1.76 value I predicted was classical, but using my new approach the peak of EUR and USD was 1.60. I did not mention this because I did not believe this new approach and stuck to my old methodology. Though it seems to be have been right. And I used this methodology on oil where I missed the peak by 63 cents on the USO (120).

So how can this help you? Easy brush up your probability, chaos, psychology, and statistics knowledge. While I will not disclose my approach, I can tell you the books from John Hull, and John Murphy are very useful. Combine the materials in both of those books and you get what I have.

What I plan on doing with this approach is the pricing of options, since now I have a tool that I can use to include theta into my calculations. After all if you have a tool that is reasonable at mapping walks, you can determine the optimum option strategy and take advantage of it.