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Revision as of 23:05, 16 October 2016

Welcome to the explain xkcd wiki!
We have an explanation for all 2100 xkcd comics, and only 42 (2%) are incomplete. Help us finish them!

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Go to this comic explanation

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.

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.)

The shape of the chart is similar to the exponential behavior of cryptocurrencies when they are successful, where price (positional height on the chart) roughly increases while volatility (height of the bars or candles themselves, and of the peaks and troughs, on the chart) does the same. Technical analysis used to be an esoteric domain held by well-paid stock analysts, but as cryptocurrency has spread and taken down the many barriers to engaging in investment trading, people from all walks of life have begun staring at charts like this.

Graph labels and possible meanings
Allegro Tempo notation in music: played quickly and brightly (translation from Italian: cheerful, lively) - a series of very small changes in this region of the graph might suggest notes played quickly
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
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
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! The three circles this label points to mark periods of growth that immediately preceded a decline. Ideally for someone performing a technical analysis, if such occurrences can be foreseen accurately it would be a major boon for the stockholder, as they could be tipped to sell it right away before the price drops and net a cash profit.
Hark! The cliffs! A long bar suggesting a steep cliff
Declination A term which sounds similar to decline, but actually refers to the angular distance of a point from one of the poles. The declination of magnetic north is used to correct the difference between true and magnetic north.
Inflection A point at which the slope of a graph changes from an increasing slope (getting steeper) to a decreasing slope (getting less steep).
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", also, the shape is similar to that of a bathtub, and is drawn containing water.
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. It is tempting when looking at market charts to draw imaginary lines that connect the extrema and hope it means something about the future. The drawn line in this case also just so happens to ignore the many periods of decline marked under "Declination" -- in this case it did eventually recover, but later labels (such as "likely to continue forever" at the end) suggest that this is more likely a case where blind optimism just so happens to have been right for those two particular points (as opposed to the many more possible pairs of points where the line wouldn't be so positive).
Yikes This section of the chart refers to the actual use of a candlestick chart, which is to document the difference between the opening and closing value of a stock. A long red bar shows that a stock closed at a much lower value than it opened at, which would be disastrous for someone trading that stock.
Wrong! The circled pair of bars are the only pair in the whole graph where two red bars (negative growth) that large are next to each other -- larger red bars exist, but not next to another one of similar magnitude. Labeling it "wrong" suggests the analyst is choosing to ignore reality by throwing out actual past data rather than revise the theory being held.
If I add some lines here I can convince myself I'm doing something more than just seeing patterns in the graph of a random walk A random walk is a mathematical object that describes a path that consists of a succession of random steps. Randall is trying to convince himself that the patterns in the stock chart are more meaningful than just random data. The random walk hypothesis is a financial theory that states that stock prices evolve according to a random walk, thus short-term price changes are random and cannot be predicted from past history.
Slope The slope of a graph is the ratio of the "vertical change" to the "horizontal change". This could also be a play on a second meaning of slope, meaning a rising or falling surface in general.
Could be an omen This again makes reference to the financial meaning of the candlestick chart. The top of the small grey tick represents the highest value that the stock sold at over that day. The joke is that even though the stock did not grow appreciably, and actually sold at some point in the day for much lower, that it "could be an omen" that the value was rising.
Red + Green = Christmas Red and green are traditional colors for the Christmas holiday in the U.S.
Likely to continue forever This is the opinion held by everyone who buys at an all time high. It's been rising so much, surely it's the best time to buy! We could make millions! Such times are generally followed by a sharp downturn resulting in significant losses, as can be seen historically farther back on the chart. Cryptocurrency communities have significant members who call themselves "hodlers" -- these people always trust that the price will eventually go up even higher, because it has recovered so many times in the past.

The title 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. The quote was about the stock market and high speed traders in particular. It comments on the 'financialization' of the economy, where activities like speculation and abstracted financial products have become an increasingly large part of the economy, as opposed to investment in productive industry.

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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