The Great Technical Analysis Bamboozle

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The Great Technical Analysis Bamboozle

Who doesn’t like to win giant stuffed animals at the fair right?

The idea of becoming the hero and delivering a furry prize to your main squeeze is sure to win you brownie points.

Like coming back from the hunt with the yummy carcass of a wild animal.

You ever play those carnival games that look simple as pie, but they turn out to be damn near impossible?

You know…the ones where you pop under-filled balloons with dull-tipped darts…

Or shoot out the center of a target with a BB gun.

As you probably know, those games are rigged.

I was shooting free-throws to win a prize, and noticed that not only is the hoop almost the size of the ball itself, but it’s also oblong like a football.

 

 

How do you get a basketball into that?

I got bamboozled! Hoodwinked. Swindled.

Now have you ever sold a stock because it broke “support”?

Did you know that buying after a support break on the S&P 500 turns into a winner 70.66% of the time since 1982?

Here’s a recent example right after the Brexit vote:

 


Strategy buys SPY after “support” is broken

 

The trading strategy is a simple one I threw together for this example (I don't trade it): Buy when the S&P 500 index closes at a new 20-day low.

Sell when it hits a 5-day closing high.

It’s counter-intuitive right?

If you turn on the financial boob tube, you’ll see technical analysts finger painting lines on charts like a kindergartner.

If that line breaks, down goes the market, cradle and all?

If that’s the case, then how come the stock market comes roaring back 70.66% of the time?

What happened is that technicians stopped doing the hard work of proving what they say is true.

If they did the work, they would have seen that support breaks stopped being a harbinger of doom back in 1982.

That's the same year index futures were introduced.

More on that in a minute.

From 1926 to 1982, breaking support was indeed a bad thing.

 


Buying new 20-day lows. Selling 5-day highs. Dow Industrials 1926-2016

 

Ever since index futures were invented in 1982, the market's behavior has become more volatile in the short-term.

That's because index futures offer tremendous leverage that fund managers can use to their advantage.

More leverage = ability to move price around with less money = more volatility.

The index futures market is the most important market because it controls the stock market.

Like a 100 pound jockey controls a 1200 pound thoroughbred.

Its daily volume is a fraction of Tesla's, but it's notably responsible for the flash crash of 2010.

It pays to keep a close eye on this market, which is why the government forces large traders to reveal their positions every single week.

If you feel like the stock market is rigged like a carnival game, you're not alone.

But that doesn't mean it can't be beat.

You've just been following the wrong advice from the wrong people.

By the way, a buddy of mine showed me how to beat the free-throw game. The ball is over-inflated and the backboard is extra bouncy.

So what you have to do is arc it up in the air and swoosh it in. No small task, but I've seen him do it.

Or you can take a short-cut and buy one of the big prizes (like the ever-popular Rasta Banana) for about $24 online.

 

 

Trade smart,

Dan “Prince of Proof” Murphy

Note: If you're looking for an alternative to your current investment strategy, watch this presentation to learn more about monitoring the index futures market.

There was recently abnormal activity in the index futures market that you should know about.