Wednesday, March 30, 2011

Meyers, The Technical Analysis Course

You’ve finally broken down and decided you need to know something about technical analysis. You could turn to classic texts such as Technical Analysis of Stock Trends by Edwards and Magee. But if you’d like a much easier read with more recent examples, you could instead opt for Thomas A. Meyers’ The Technical Analysis Course: Learn How to Forecast and Time the Market, now in its fourth edition (McGraw-Hill, 2011).

The book, covering both basic chart patterns and technical indicators, is structured as an introductory course. It includes frequent exams and a 110-question final. Answers are at the back of the book.

Since the paperbound book measures 8 ½” x 11”, the charts—some hand drawn, the rest produced using MetaStock software—are easy to read. In keeping with the author’s top-down approach to the equity market, there are charts of market indexes, industry groups, and individual securities.

For Meyers the structured approach to technical analysis is more or less the same, no matter what kind of chart it is being applied to. In the case of individual security analysis, it consists of seventeen steps, some basic and others optional. The basic steps are: (1) construct a bar chart of a security, (2) examine it for reversals, consolidations, and gaps, (3) draw trendlines and support and resistance lines, (4) perform relative strength analysis comparing a security to its industry group or to a market index, and (5) calculate and plot a simple moving average of closing prices. Optionally, one can: (1) draw trend channels, fan lines, percentage retracement levels, and speed resistance lines, (2) examine the chart for bull and bear traps and failed trendline signals, (3) perform a volume analysis, (4) calculate and analyze on-balance volume, (5) analyze volume using the volume reversal technique, (6) calculate and plot weighted, exponential, and multiple moving averages, (7) plot trading bands, (8) plot Bollinger Bands, (9) calculate and analyze momentum, rate-of-change, and moving average oscillators, (10) calculate and analyze the RSI, (11) calculate and analyze stochastics, and (12) calculate and analyze MACD. These seventeen steps pretty well summarize what is covered in the book.

One good feature of this course is that it includes a lengthy case study, using Starwood Hotels (plus its industry group as well as the S&P 500 Index). The author presents 40 marked-up charts over longer and shorter time frames, all generated as of December 31, 2009. Each chart comes with commentary.

My major concern with a book that is so elementary is that it may leave the reader with a false sense of competence. Although I didn’t take the tests myself, I looked at enough questions to realize that they were incredibly easy. Pity the reader who aces the exams and considers himself ready to commit money to the equity market using technical analysis. This is like getting an “A” in first-semester French and thinking you can land a great job in Paris, fluent French required.

Admittedly, Meyers makes no such claims for his book; indeed, he refers his readers on to twelve technical analysis books that “offer a wealth of valuable information.” (p. 329) So should those neophytes interested in learning about technical analysis skip the baby step and plunge into material that is denser and sometimes more nuanced? That’s all a matter of personal preference: do you want intense elementary French (two semesters packed into one) or a language course that proceeds at the normal pace? Given my singular lack of talent for learning foreign languages I would opt for the latter. But since I am a quicker study in things financial, I would probably choose the former.

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