2101: Technical Analysis

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Technical Analysis
"I [suspect] that we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity. I suspect that the immense power of the computer is being harnessed to this 'paper economy', not to do the same transactions more economically but to balloon the quantity and variety of financial exchanges." --James Tobin, July 1984
Title text: "I [suspect] that we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services, into activities that generate high private rewards disproportionate to their social productivity. I suspect that the immense power of the computer is being harnessed to this 'paper economy', not to do the same transactions more economically but to balloon the quantity and variety of financial exchanges." --James Tobin, July 1984

Explanation

Ambox notice.png This explanation may be incomplete or incorrect: Comic is still undergoing TECHNICAL ANALYSIS (this is just the prologue). Do NOT delete this tag too soon.
If you can address this issue, please edit the page! Thanks.
Technical analysis is a field which attempts to study stock markets, cryptocurrency markets, etc. statistically (without regard to the fundamental value of the assets), seeking to profit off the patterns that are found there.

The theoretical value of a stock is the sum of all its future earnings, with earnings in the future discounted appropriately to account for the time value of money. Because these earnings are never fully predictable, traders may have different ideas about the true value of a stock, and buy the stock if they believe the currently offered prices are particularly low, or sell it when the prices are high.

Technical analysis, however, does not even attempt to understand the earnings of the stock, instead focusing on the shapes and patterns that result from traders making their moves. While there is a human behavioral component to stock trading, it is not clear that one can extract much information from the shapes of stock charts. To the extent it does work, a substantial part of its success may be simply an artifact of the herd behavior of traders who engage in technical analysis, a zero-sum game.

The comic displays a stock price chart, annotated with labels which purport to be technical analysis. These labels are nonsense from the perspective of technical analysis, but do accurately describe the graph itself: "allegro" (a musical term used to set the tempo at the beginning of a score), "prologue" (an introductory section of a play, book, or similar), "lumbar support" (the thing in a chair shaped to better support your back), "bathtub" (possibly a reference to the so-called "Bathtub curve"), "uptalk" (a speech pattern). One label celebrates that "these two points define a line! Promising signal." (In Euclidian geometry, any two points define a line.)

Graph labels and possible meanings
Allegro Tempo notation in music: played quickly and brightly - a series of very small changes in this region of the graph might suggest notes played quickly
Decline Describes a negative trend
Doldrums A stagnant section of the graph with little movement
Spline A spline is a mathematical means of generating a smooth curve, referring to the smoothed curve shown here
Prologue A prologue is an introduction to a book or other work; this presumably refers to the initial period of minimal growth which is moving toward a much more active period
Lumbar Support A cushion or other device that provides support to the lower part of the spine, a play on the preceding spline
Renewal Strong upward trend; also might suggest the growth of green bars, like greening up in the spring
Hmm!
Hark! The cliffs! A long bar suggesting a steep cliff
Declination Another term for a downward trend
Inflection A point at which the slope of a graph changes
Uptalk A pattern of speech in which each sentence ends with rising inflection? like a question? A play on "uptick", and also on the second meaning of "inflection"
Bathtub possibly a reference to the so-called "Bathtub curve"
These two points define a line! Promising signal. In Euclidian geometry, any two points define a line; also looks somewhat like a communication line between two towers
Yikes
Wrong!
Slope
Could be an omen
Red + Green = Christmas
Likely to continue forever

The mouseover text is a quote from James Tobin (from his 1984 paper On the efficiency of the financial system) that raises a question of very talented people building systems to make themselves a lot of money without actually accomplishing anything worth money. This concern is perhaps not in and of itself about technical analysis, but more about the stock market and related trading ecosystems in general, in particular high speed traders. While it is not always easy to understand why certain forms of market activity might be valuable, and hard to put a price tag on concepts like "risk," "liquidity" and "price discovery," sometimes people are just working to trick others into bad deals, or forcing market participants to pay them unearned money. This may make the smart people a lot of money, but it does so by harming society, not helping it.

Interestingly, this comic appeared the day after Oxfam reported that the world's 2,200 billionaires had added 12% to their wealth in 2018, while the 3.8 billion people comprising the poorest half of the world's population had lost 11%. Perhaps this prompted what appears to be Randall's jab at those whose business is merely making money.

Transcript

Ambox notice.png This transcript is incomplete. Please help editing it! Thanks.
[A series of red and green box-and-whisker plots form a line that starts in the bottom left corner of the image and wiggles up to the top right corner, with a series of peaks and troughs that resemble a typical stock market diagram. The diagram is annotated with lines, arrows and text.]
[Title in top left corner]
The basics of technical analysis
[A roughly horizontal section with mostly green boxes:]
Allegro
[A horizontal bracket encompasses the next three sections]
Prologue
[Slope becomes slightly negative. Mostly red boxes, bordered with a black line above and below:]
Decline
[A roughly horizontal section with mostly green boxes, bordered with a black line above and below:]
Doldrums
[Line curves upwards with mostly green boxes, with a dashed black line below:]
Spline
[Three green boxes at minor peaks in the line are circled and indicated with arrows:]
[Hmm!]
[A section with slight positive slope and a mixture of red and green boxes, with a solid black line below:]
Lumbar support
[Slope increases. All green boxes, with a black line through the centre:]
Renewal
[A sharp upwards incline, with two large green boxes:]
Hark! The cliffs!
[Two black dots and a dashed black line connect two major peaks:]
These two points define a line! Promising signal
[Inside trough between two major peaks is a roughly drawn black triangle:]
Bathtub
[Slope becomes negative, mostly red boxes with a black line through the centre:]
Declination
[At the lowest point of the trough:]
Inflection
[Slope becomes positive, mostly green boxes with a black line through the centre:]
Uptalk
[Slight negative slope, with large error bars. Mixture of red and green boxes. One red box is marked with an arrow:]
Yikes!
[Negative slope, all red boxes. Gap between two central boxes is circled:]
Wrong!
[Line rises then falls. Mixture of red and green boxes with non-parallel dashed black lines above and below:]
If I add some lines here I can convince myself I'm doing something more than just seeing patterns in a graph of a random walk.
[Positive slope, all green boxes with a black line through the centre:]
Slope!
[One error bar on a green box is circled:]
Could be an omen?
[Arrow indicating peak:]
Red + Green = Christmas!
[Positive slope, all green boxes with a wiggly black arrow through the centre. A separate arrow points off the edge of the page:]
Likely to continue forever


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Discussion

The Tobin citation comes from James Tobin's Fred Hirsch Memorial Lecture "On the Efficiency of the Financial System" in 1984 [1].

The explanation says “allego” and “prologue“ are “musical terms such as may be used in the introduction of a performed piece”. That may be true of “prologue” but “allegro”, according to Wikipedia, is “a tempo marking indicate to play fast, quickly and bright”. 108.162.219.58 11:40, 21 January 2019 (UTC)

And, derived from this, a movement of a piece that is performed quickly may be referred to as an allegro. It can also be used to refer to an entire piece, such as this piece by Mozart: [2] Kazzie (talk) 12:00, 21 January 2019 (UTC)
But based on the placement of the allego and the way it is written it is most likely a tempo. Tempo goes just above the music and in this case it is the only word on the page that is italicized. 162.158.186.108 14:09, 21 January 2019 (UTC)

How would this compare with “candlestick patterns” - the bathtub one looks like a funny name for a pattern *meant* to signal that prices could rise https://www.investopedia.com/articles/trading/06/advcandlesticks.asp. 172.68.144.145 13:55, 21 January 2019 (UTC)

Random Walk might refer to https://en.wikipedia.org/wiki/Random_walk Curtobi4 (talk) 14:00, 21 January 2019 (UTC)

https://en.wikipedia.org/wiki/Random_walk_hypothesis 108.162.241.202 16:33, 21 January 2019 (UTC)
This is correct, also called Brownian Motion. The shape of these graphs is incredibly similar to that of the motion of a speck of dust floating in coffee. 172.68.65.228 03:26, 22 January 2019 (UTC)

Should we make a table for each term like there is for other comics? 162.158.63.232 18:01, 21 January 2019 (UTC)

Yes please. Also, the individual jokes could be explained better. For instance, I'm pretty sure "lumbar support" is there as a joke on the word "spline" looking & sounding a lot like "spine". I'm 90% certain it's a pun, but that's not mentioned yet.
ProphetZarquon (talk) 19:30, 21 January 2019 (UTC)

XKCD lessons with Randall: Today I learned that the word "Allegro" actually has a meaning, and isn't just a random website name. 162.158.92.160 19:27, 21 January 2019 (UTC)

The fundamental problem is that price movements are NOT a random walk. It is safe to assume that people who know a market well will study it, and make purchases/sells based on the underlying market drivers. And in doing so, they will leave "tells" in the pricing data. It becomes possible to look at markets, and see what the people in-the-know are doing, and follow along after them. That is the fundamental basis of technical analysis, and it works -- it works unbelievably well.

If there is a problem, it is that computers can do this pattern recognition so fast that there is longer any room for people to do this.

In other words, computerized arbitrage has gotten so good that people need not apply, and a few high-end groups with high speed electronic trading can get in before any person can.

Keybounce (talk) 00:31, 22 January 2019 (UTC)

Keybounce, do you have any thoughts on how to share some of that with the layperson? The cryptocurrency markets are highly volatile and worth many billions of dollars. People with little resources are getting involved and either going bust or becoming millionaires. The trading history makes it clear there is a lot of automated trading for a long time, but I'm not sure many people really know what they are doing, and the publically available code appears pretty weak. There is a lot of opportunity here to make huge impacts on major economic and social groups in ways that could really help problems in the world. 172.68.65.228 03:32, 22 January 2019 (UTC)

True that computerized arbitrage/high frequency trading occurs at speeds which leave zero room for human reaction times (see the $$$ made by shaving only 3 milliseconds’ [!!] from the transmission delay, when Jim Barksdale built a new straight-path fiber optic line from Chicago Mercantile to NASDAQ in NJ in 2010, and by McKay and Tradeworx using microwave tower relays since then), but computerized arbitrage is, broadly, not the same as technical analysis of markets. Arbitrage takes immediate advantage of brief pricing trends and inefficiencies, while analysis seeks to predict pricing. Of course, technical analysis is also computerized at inhuman speeds, and its algorithms are used in arbitrage, but seems to me the comic isn’t about arbitrage, as such.Miamiclay (talk) 20:03, 22 January 2019 (UTC)

I'm disappointed that there wasn't a "WOW!" entry John.Adriaan (talk) 01:38, 24 January 2019 (UTC)

I fixed your link, hope that's okay. 172.68.51.178 13:29, 24 January 2019 (UTC)

I always cringe when I see some trader (who probably don't have an economy degree) try to show with technical analysis that he could predict X happening over a year in advance. Just this day I saw it in my daily economy news. No, sorry to tell you this... if you couldn't predict X happening the day before you sure as hell couldn't predict it a year in advance. Conversely it doesn't make sense to apply fundamental analysis to stocks that you don't plan to keep for more than a year. That's not to say these methods are useless, they are useful for making educated guesses but all should be aware of their limitations. 162.158.89.61 19:30, 24 January 2019 (UTC)

Despite the comment on the social usefulness of global trading, I'd argue that it has largely replaced outright wars. So we now have a lot more people than the world needs. Though implying that global trade is inherently evil is at best just not very well informed. The market can to some degree fix global inequalities, but it also concentrates money on a few hands, which is the inevitable outcome if it is not regulated somehow. The problem here is you can't really regulate capitalism unless you do it globally. 162.158.92.34 20:23, 24 January 2019 (UTC)

I'd argue that global trading has increased, not decreased, wars: roughly by creating the concentrated disparities of resources and power that you describe. 162.158.78.220 23:34, 24 January 2019 (UTC)