Bruce Kamich: Defending chart patterns

By David Bukey
In February 2009, Bruce Kamich faced a tough room as he spoke to a group of brokers in Philadelphia about the stock market’s likely rebound. Kamich, a Morgan Stanley Smith Barney vice president, urged his clients to look beyond the market despair, arguing stocks could soon begin a 30- to 40-percent rally. But no one was listening.

“They were under the desks,” Kamich says. “They never had the guts to raise cash and play the upside.”

For many traders, the blind panic that arose from the stock market’s steepest decline in a generation was surprising. But Kamich, a 36-year veteran, had seen bear markets before. After earning finance and economics degrees from the University of Connecticut, Kamich began looking for work on Wall Street in the summer of 1973, just as stocks were entering a prolonged decline.

Brokerage offices were shutting down so quickly that Kamich sometimes never got to the second round of interviews.

“I would have an interview on Monday, and the firm was toast on Friday,” he says.

The 1973-1974 stock-market meltdown steered Kamich away from equities and into commodities, where he began his career learning the intricacies of grains, livestock, and “softs” (coffee, sugar, cocoa) at hedging firm Industrial Commodity Corp.

At first he focused on market fundamentals — crop reports, weather, and inventories — but he also drew price charts by hand, a task that drew him to technical analysis and classic chart formations such as head and shoulders, double tops, triangles, flags, and pennants. 

Kamich’s bosses at Industrial Commodity Corp. relied, in part, on technical patterns, although they never shared their approach. He believes they followed an offshoot of Elliott Wave, a subjective form of technical analysis rooted in the idea that price movement unfolds in structured trend and countertrend price waves.

Because of his bosses’ secrecy, Kamich had to learn technical analysis on his own, enrolling in a 1974 course taught by Ralph Acampora, co-founder of the Market Technicians Association (MTA). After positions as a retail broker and technician at Merrill Lynch and other firms from 1976 to 1984, he joined fixed-income advisory firm McCarthy, Crisanti and Maffei. The bond market “forced me to watch everything else,” Kamich says. “It all comes together. If commodities are going up, then it’s only a matter of time until interest rates rise.”

When the bond market cooled off in the late 1990s, Kamich shifted gears and became a journalist, reporting on the coffee and cocoa markets for Reuters.

“I got along with the traders because I spoke their language,” he says. “I knew about the technicals, while most reporters find a fundamental story to fit the price action.”

Meanwhile, Kamich began teaching a course in technical analysis at Baruch College in New York. He also taught at Rutgers University as a part of his (and the MTA’s) mission to introduce technical analysis to college students across the country. In 2002 Kamich wrote How Technical Analysis Works (New York Institute of Finance), a beginners guide to chart patterns, market dynamics, and indicators. Two years later, he joined brokerage firm Smith Barney as a technician.

In 2009 he published Chart Patterns (Bloomberg Press), which avoids textbook definitions in favor of learning how to spot chart formations in real markets. Flexibility, Kamich contends, is the key to trading chart patterns well: “Few patterns unfold as textbook examples,” he says.

However, Kamich disagrees with critics who say chart analysis is too subjective, arguing that today’s narrow focus on high-frequency trading and quantitative techniques may again backfire, as it did when computer-driven trading firms stumbled in August 2007 after jumping blindly into the same stocks with similar strategies.

“Not all technical patterns work,” he says. “But the edge is moving away from split-second analysis. The toughest part is trying to master the patterns.”

AT: Did you write Chart Patterns to expand upon the introductory material in your first book?

BK: No, Chart Patterns has a narrower focus. It is meant for traders to understand patterns on bar charts only. The book is specifically about head and shoulders, flags, pennants, and so on. No indicators are discussed, although you can certainly pair chart patterns and indicators to get a better idea of market direction.

In researching the book, it was interesting to review the technical literature from the 1920s, see how concepts evolved, and reflect on how I was taught the subject. And when I try to teach technical analysis to students, those issues stand out.

In 1976, I visited John Magee, co-author of the classic book Technical Analysis of Stock Trends (Amacom, 8th edition, 2001), as a project for a class I took from technician Alan Shaw. Magee gave me a photo of a cow, but I didn’t really see the animal right away. But once he described what I was looking it — the snout, the ears, and so on — my brain filled in the rest and the picture became clear.

When Magee taught courses on technical analysis, he gave the cow picture to students at the end to demonstrate that you don’t know what a flag, triangle, or wedge pattern is until somebody shows it to you. And then it comes into focus. Otherwise, [patterns are elusive] and don’t mean anything to you. But when you train your eyes to see it, a new world opens up.

My students have the same experience. Some see the cow right way and pick up chart patterns quickly. And some just struggle with it. But that’s okay, because you can use mathematical tools such as moving averages. Some students are more comfortable with moving averages, because there is no gray area. Price either closes above a moving average or it doesn’t.
   
AT: In your book, you claim a trader’s edge now lies in refocusing on basic chart patterns, as opposed to the algorithms and back-testing techniques that dominate the markets today. You argue that chart analysis is still relevant, perhaps more than ever. But how do you respond to critics who say chart analysis isn’t objective or methodical enough to rely on?

BK: All techniques have limitations and nothing is 100 percent accurate — not fundamental, technical, or quantitative approaches. They all have their flaws, and in reality, you should blend them. You should understand a stock’s fundamentals and then look at a chart. If you find a great story, does the chart confirm it? Or if you find an appealing chart, does the fundamental story support it?

Many people are using black-box approaches, and there’s a lot of algorithmic trading in the markets. But they all tend to use the same formulas — the resulting price moves are pretty dramatic when they all trigger at once. The edge may be more mathematical now, but it will move full circle back toward chart patterns.

If you find, say, a triangle pattern that is two-thirds complete, you can [get it early] if all other conditions line up. That’s your edge as opposed to waiting for some quantitative relationship to appear.

For the complete article, see the May 2010 issue of Active Trader magazine. Click here to subscribe.



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