20-Years of Technical Analysis:
How Much Has the World Really Changed?

by, Barclay T. Leib

December 1999

In the summer of 1980, in a small alcove of the venerable Morgan Guaranty Trust Company's Treasury Division, a long gray-colored video machine issued an audible "ping" as the gold market recorded an up-tic. This was during the days before the PC, before the first trade had cleared on a Reuters Dealer, when the concept of the Internet and Internet day-trading were not yet even a twinkle in the eye of a Silicon Valley engineer. It was a world of open outcry, of phone lines, and of telex machines. Orders still reached the floor of the New York Stock Exchange by old-fashioned pneumatic tubes, and taped phone lines were a new novelty in interbank currency dealing.

The Machine Nobody Wanted

Amidst the scores of traders and salespeople who sat in that Morgan trading room and other rooms like it on Wall Street, few if any people had actually learned to use this machine - a machine called a "Tradecenter" - that showed pictures of charts. And so it was that I began my career on Wall Street - a twenty-year old kid doing a summer internship, sitting in a room with a machine that nobody knew how to use, and to which no one was indeed paying any attention.

"Ping, ping, ping, ping..." You could almost sense the franticness of the trading floor as the noise of the machine beeped forth, changing its rhythm with the changing rapidity of the actual number of trades completed on the Comex trading floor some eight blocks away. I loved it. My boss didn't.

"Can't you shut that damn thing off?" he would yell at me, and thus it became one of my first tasks to try to mute the machine that nobody wanted. I would quickly learn that the actual "pings" being generated by the machine could not be totally suppressed, although one could decrease the volume at which they were emanated. I feared for the machine's very survival given its general annoyance to my employer. But my fear was misplaced.

The Learning Curve

From that early Tradecenter terminal, an industry was born. Chartists and technicians had of course been around since the early 1900's (if not from the very dawn of free-trading markets), but only post 1980 would charts become on-line, real-time, and allow the intraday tic variety to be viewed with such ease of effort. Tradecenter would soon be followed by Teletrac and MarketVision, Ensign and MarketView, Future Source and Reuters Graphics, among others. These systems in turn would lead to popular web-pages such as BigCharts.com and Quicken.com. But in 1980 none of that existed yet. There was just this one Tradecenter machine sitting on a side credenza.

I quickly mastered the machine's commands; stumbled across the classic text of Edwards and Magee's Technical Analysis of Stock Trends; and read it voraciously. I pre-programmed my library of technical pages and studies, and toyed with moving averages and envelopes, oscillators and RSI's, parabolics and stochastics. I started collecting intraday chart patterns and took the time to categorize each daily pattern that I noticed had a distinctly different looking profile. It was not a scientific approach. It was the approach very much of a neophyte trying on different techniques to see how they fit and worked.

In the coming several years I would teach myself a great deal, inclusive of the following maxim: although one can seldom anticipate the actual news, the value of a given news event is almost always a function of the preexisting technical position of the market. When Anwar Sadat was shot on October 7, 1981, gold had already been in an overbought situation, and thus rallied a few more dollars on the news before dropping like a rock. Conversely, when in April 1982 the Falklands War erupted, gold was technically oversold at its outset, and the price of gold vaulted higher on each Exocet missile attack -- far more than one would have ever expected for such a distant news event in the South Atlantic. Then gold became so overbought once again -- with an RSI above 80 and a Bullish Consensus sentiment number to match -- that the mere announcement of a Falklands cease-fire in early June 1982 sent the metal plunging almost limit down in 30-seconds.

The extremes of bullishness and bearishness that transpired in gold during those early days is reminiscent somehow of the more recent gyrations in many individual equity prices. That staid institution of Morgan Guaranty - now of course renamed JP Morgan - is itself a wonder to behold these days as investors rush to clobber it on interest rate jitters, only to rush to buy it again on the end of Glass-Steagall. There seems to be a general mood of fear followed by outright euphoria, but within this environment, the old maxim continues to work. In the real world, a given news event may or may not be truly that important, but when the market is off-sides or in a vulnerable position, even the most innocuous piece of news can have a huge impact. As a business, JP Morgan undoubtedly has a solid foundation. As a stock, its proper valuation is very much out of control as investors regularly over-trade each piece of available news in an exaggerated fashion.


As I toyed with my Tradecenter machine back in 1980, I will always remember a middle-aged salesman with a thick Boston accent counseling me: "The only reason technical analysis works is because everyone else looks at it. A trendline gets broken and it becomes a self-fulfilling prophecy that the market breaks out." I argued vociferously with that salesman back then that this was not the case. The mere fact that I was the only person on an entire JP Morgan trading floor even looking at charts almost guaranteed my side of the argument. The world from a technical perspective was relatively crystal clear and pure. If you saw a "head and shoulders" pattern, it could generally be believed; if you saw a trendline break, it truly gave you an edge over others because you knew that the supply-demand balance was shifting -- that one side of that balance had just overcome the other.

In 1999, I am honestly less sure of my own argument. Now everyone does have a chart machine, and there are thousands - perhaps millions - of traders sitting around the world looking at the same pictures, pouncing on the same breakouts. The purity and usefulness of technical analysis has perhaps been hurt by its very popularity. In addition, large banks regularly gun for chart points in order to elect the stops that have accumulated on the order books at a given critical level. Overall, the Boston-accented salesman might have a better point.

A New Website

And yet, it is within this environment, that I embark upon this website Sandspring.com.

I am going to try to highlight a "chart of the week" somewhere within the capital markets that shows a compelling technical pattern. I am going to try to relate these patterns to potential fundamental news events that could cause an overbought or oversold situation to suddenly reverse. I am going to respect the tenets of such visionaries as Leonardo Fibonacci and R.N. Elliott in my analysis. I am going to try to be objective and single-purposed: to highlight potential trading opportunities when the weight of the technical evidence so demands.

Undoubtedly, I will get it wrong some of the time, and undoubtedly I will miss spotting many a compelling chart pattern simply given the variety of markets that I am endeavoring to watch. But I do want to be useful and different in our analysis than most, and I will do so by combining as many technical tools together in our analysis as possible. I will focus not just on a technical picture using traditional Edwards and Magee techniques, but I will highlight extremes in market sentiment, divergences in price momentum, Elliott Wave counts, and possible analog pattern matches. All of these tools do not regularly come together in a single compelling technical picture all of the time. But occasionally they do.

Hopefully I will be there when they do, and readers of this column will thereby benefit.

The modern day machines may no longer "ping" as did the early Tradecenter, but there is still a useful story within them to hear.

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