Technical analysis is a methodology used by traders to identify existing patterns in market movements, in order to predict how prices might move in the future and develop trading strategies.
The idea is that humans — the entities who ultimately drive the asset prices upwards or downwards, based on how many of them want to buy and how many want to sell at any given point in time — are forever driven by the same impulses (largely fear and greed), and that therefore one can predict how they will behave based on their past behaviour.
The methodology sounds quite techy, being called technical analysis and all, but it might be better if it were called emotional or psychological analysis instead, seeing as those are the things that it captures (or attempts to capture, anyway).
Technical analysis is distinct from fundamental analysis, which studies a whole range of factors — such as economic data, company earnings results, and political developments, to name but a few — in order to measure the intrinsic value of a particular asset.
Many people buy into the latter, but think that trying to predict the direction of a given share price, commodity, or any other asset, based on drawing some lines on a chart (the former) is a little silly. But there’s silly, and then there’s downright stupid.
Given that technical analysis reflects past human behaviour, it would be a little surprising to find it used in the context of an economic indicator. And yet that is precisely what Sam “The Nude Investor” Bloom appears to have done with this U.S. consumer price index chart:
Do note the opening line: “Inflation charts look as if they’re about to explode.” People saying various things are “about to explode” based on their blind faith in chart analysis is the kind of thing that gives TA a bad rap. But one can forgive hyperbole, perhaps; this feels a little more like utter nonsense.
The movements in the consumer price index are not the result of simple fluctuations in supply and demand, but rather, a huge and complex set of factors. Inflation doesn’t rise and fall based on people deciding they want to buy and sell inflation. It is not, therefore, subject to the same sort of herd-like behaviour that you’d see in, say, stock markets, where using TA makes much more sense.
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