John Magee on Random Walks and Computers
I've noticed a lot of pessimism in the market lately. And not just from the sentiment data, but from people all around me. It's fascinating to watch formerly active participants just throwing in the towel. They can't make money so they're just giving up. And it isn't their fault, it's always the market's fault right?
Here is a great quote from Richard McDermott:
"To the random walker, who once confronted John (Magee) with the statement that there was no predictable behavior on Wall Street, John's reply was classic. He said, "You fellows rely too heavily on your computers. The best computer ever designed is still the human brain. Theoreticians try to stimulate stock market behavior, and, failing to do so with any degree of predictability, declare that a journey through the stock market is a random walk. Isn't it equally possible that the programs simply aren't sensitive enough or the computers strong enough to successfully stimulate the thought process of the human brain?" Then John would walk over to his bin of charts, pull out a favorite, and show it to the random walker. There it was - spike up, heavy volume; consolidation, light volume; spike again, heavy volume. A third time. A fourth time. A beautifully symmetrical chart, moving ahead in a well-defined trend channel, volume moving with price. "Do you really believe that these patterns are random?" John would ask, already knowing the answer."
*John Magee, died June 17, 1987. In 1948 co-authored Technical Analysis of Stock Trends with Robert D. Edwards. This book, often nicknamed, the Bible of Technical Analysis, is considered the definitive work on pattern recognition analysis.
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