Does Technical Trading Work?

An interesting profile appeared over the holidays in both Bloomberg and The Washington Post of Tom DeMark. He’s a little-known head of a research firm that provides technical trading data to big investors, such as hedge fund SAC Capital. DeMark’s expertise is known as technical trading. Technical trading ignores fundamentals. Instead, trades are based on chart patterns and math formulas. DeMark doesn’t manage money, so there’s no track record of that sort. But a number of successful investors pay for his research and have great things to say about him.

The profile is interesting because it’s partly a primer on technical trading, a critique of the method, and reveals some of DeMark’s key indicators. They’re not easy to follow or compute, but the discussion is interesting and informative.

Burbank says that he’s tested DeMark’s algorithms and that they’re much more predictive than other systems. “Using DeMark indicators is like seeing the market in color, when before you were looking at it in black and white,” he says.

Among DeMark’s calls: On Sept. 22, 2011, he said the Standard & Poor’s 500-stock index would soon bottom at 1,076 and then rise 20 percent. The S&P touched 1,074.77 intraday eight trading days later and had moved up 20 percent by Jan. 10. His system also flashed buy just before a July rally in oil futures and an August surge in silver.

His latest call on stocks was Oct. 24, when he said the S&P would reach 1,480 — a new high for the year — within two weeks, then reverse. He was right about the decline, not the peak. The index rose to only 1,434 intraday before falling. As of the market close Nov. 12, it had dropped 3.8 percent from that high.