April 21st, 1982: the day technical analysis died

Technical analysis ("TA") officially died on April 21st, 1982, the day stock index futures first appeared on the Chicago Mercantile Exchange.

Ever since stock index futures were introduced, the stock market’s behavior has become more volatile in the short-term due to the tremendous leverage that traders can use to their advantage (or demise).

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

You should pay attention to the S&P 500 futures market because it controls the stock market.

The tail that wags the dog...or maybe more like Captain Smith at the helm of the Titanic.

So why did technical analysis die that day?

(Personally, I don’t think it was ever alive).

That leverage!

Here, I’ll show you want I mean.

Stock index futures changed EVERYTHING

Stock Index Futures Changed Everything Technical Analysis

Stock Index Futures Changed Everything

Broken support means BUY!  Not sell.

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

(This is one of the tenets of TA "theory")

Well, it turns out buying a support break in the S&P 500 is profitable 71% of the time...since 1982.

To prove that technical analysis is bunk, I wrote a few lines of code to buy the S&P 500 when it closed at a 20-day low and sold it when it hit a 5-day closing high.

Sounds like a terrible idea right?

“The market is falling apart!” - TV talking heads

If you turn on the financial boob tube, you’ll see high paid “technical analysts” finger painting lines all over charts like a kindergartner.

Have you ever been stopped out of your stocks only to watch them come roaring back?

Yeah, we all have.

They got my stop again!

They got my stop again! Technical Analysis

They got my stop again!

Buying the support break

These "pros" stopped doing their homework (does anyone in this industry do hard work anymore?)

Nice to know these guys get paid like money is going out of style.

If they put some thought and time in, they’d see that "breaking support" stopped working in 1982.

They would also realize that TA had gone the way of the dinosaurs.

(See graph below)

When people don't do their homework:

support and resistance contrarian Technical Analysis

Buying AFTER a break of support from 1920-1982 lost you money a lot of the time. However, buying a few days after breaking support AFTER 1982 made you money most of the time.

The S&P 500 is now a mean reverting market

The fundamental character of the stock market changed that day in 1982.

The S&P 500 transitioned from a trending market to a mean reverting market.

(Also called "reversion to the extreme")

Investopedia has a decent definition of mean reversion: https://www.investopedia.com/terms/m/meanreversion.asp

If you understand this one fundamental principle, you can really clean up.

But you need to use a mean reversion strategy, not a trend following one.

If you do plan on trading the S&P 500 you need a reliable Swing Trading Strategy built on mean reversion.

You need a paradigm shift

If you feel like the stock market is rigged, you’re not alone.

But that doesn’t mean you can’t beat it.

You’ve just been following the wrong advice from the wrong people, listening to “pros” that got their ideas from theories that died 36 years ago.

Take this to heart; you really need a paradigm shift, a new way of thinking.

The old way of thinking is dead.

The old way didn’t have the benefit of using computers to do the heavy lifting.

Now we do, and if you’re listening to someone that can’t prove what they say is true, hey, it’s time to get real.



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About the Author

After 12 years as an electrical engineer, I'm proud to bring a scientific methodology to an industry full of unproven claims and bad advice. I LOVE BIG DATA!

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