Technical Analysis Series - AMR

Consulting the "Magic Lines" to See Which CoalCos Are Best Positioned for Q3

If you follow me on Twitter, then you know I’m not terribly keen on using technical analysis (or “TA” in parlance) on extremely cyclical industries driven by fundamentals – like coal, for instance. Whenever I bring that up in a public forum, I usually take some flack from my trader friends…but my reasoning is pretty straightforward.

Years ago, as part of building a stock data platform at Energy Capital Research Group, the research team I led built a backtesting engine with a dedicated user interface that allowed us to either test existing indicators, or use its self-contained mathematics engine to derive new ones and test those.

The purpose was for us to be able to evaluate and perform due diligence on any bespoke trading systems that were pitched to our parent company. While our team members were all fundamental analysts by trade, we had all completed TA courses by Kase, and were interested to see how we could incorporate it into our fundamental research and price forecasting.

First I remember we backtested simple moving averages, and the results in terms of win rate were about a coin flip.

Exponential moving averages? Coin flip.

Golden Cross? Coin flip.

Death Cross? Coin flip.

Fibonacci retracements? A little better, but still under 55%.

As it turned out, technical indicators – or “Magic Lines” as I often playfully refer to them – aren’t very predictive at all for stocks.

That said, when I applied them to commodities to identify points of interest and took into account the context of industry fundamentals, all of a sudden some things began to work….