The Planet Money team deciphers whether chart reading will predict stock winners
A MARTÍNEZ, HOST:
A standard way professionals decide to buy or sell stocks is to look at a company's fundamentals, such as its sales. But others decide on their trades by taking a ruler to a stock or bond price chart and draw some shapes. It's called chart reading or technical analysis. Darian Woods and Mary Childs from our daily economics podcast, The Indicator, explain.
DARIAN WOODS, BYLINE: Helene Meisler has been working in financial markets for four decades, and she writes a column for realmoney.com.
HELENE MEISLER: I am always looking for patterns, be it in charts, in numbers - everywhere.
WOODS: In 1989, Helene was hired as the first person at Goldman Sachs to specialize in chart-reading techniques. Nowadays, it's definitely not mainstream at big firms like Goldman Sachs. But you do see chart-reading analysis at big firms from time to time. And we should say that Helene complements her chart reading with other information, like surveys of sentiment and economic indicators and industry news. But she strongly believes in the validity of chart reading as one tool.
MEISLER: There is a certain feeling you get from putting the pencil to the paper. I might not remember stock prices all the time, but if you ask me about a stock chart that I post by hand, I've got that pattern in my head, and I pretty much know what that pattern looks like.
WOODS: So how do you guard against knowing what is a real pattern and just a trick of the mind?
MEISLER: Yes. I notoriously see head-and-shoulders patterns, bottoms and tops in every chart. I just do. And whether or not they work out is a whole nother story. But it's just how my mind works.
MARY CHILDS, BYLINE: Academics in finance have pored over stock market and bond market data, and the evidence is not looking good for chart readers. Like, just because a stock was doing well on Monday and Tuesday - it has no relationship with whether it'll do well on Wednesday. Now, the odd study has found evidence in favor of the chart readers some of the time, but most academics are very skeptical, and so is Katie Martin, the markets editor for the Financial Times, who popularized the vomiting camel shape.
KATIE MARTIN: The whole thing is very obviously, to my mind, a joke.
CHILDS: In 2014, Katie wanted to highlight what she thought was the absurdity of chart reading. So she borrowed an idea that she'd seen on the internet and started drawing a new shape over chart after chart. So she's tracing the peaks in price, going up and down and up and down and down again. And when she looked at it, she saw a vomiting camel.
MARTIN: I thought it was just flat-out funny that you could see this, you know, stupid pattern that had been, like, crudely drawn on with, like, MS Paint or something over the top of this chart to make it look like a vomiting camel.
WOODS: But a few years later, crypto-trading YouTubers started taking the vomiting camels seriously.
(SOUNDBITE OF ARCHIVED RECORDING)
UNIDENTIFIED PERSON #1: This is called a vomiting camel pattern. And this is real, by the way.
UNIDENTIFIED PERSON #2: Really?
UNIDENTIFIED PERSON #1: I'm not even joking. This is actually real.
CHILDS: Katie does concede that there might be some situations when chart reading does work. Like, if everyone believes that a certain pattern means that there is going to be a rally, then that could be a self-fulfilling prophecy. But overall, she just says it doesn't make sense to her.
MARTIN: I don't want to spoil people's fun, and I know that people have made money out of this, and that's fine. That's great. That's up to them. But there are no certainties in this business, and you have to take - sort of thing with a massive pinch of salt.
CHILDS: Mary Childs.
WOODS: Darian Woods, NPR News.
(SOUNDBITE OF VENTURE ROSE SONG, "STROBELIGHTS") Transcript provided by NPR, Copyright NPR.