I agree that technical analysis (T/A) is one of many self...

I agree that technical analysis (T/A) is one of many self fulfilling prophecy techniques that have lived and breathed in financial markets over the years. It works because everyone more or less follows the same rules.

We never use T/A as an investment style however there are many people making many dollars out of it so it obviously has a profitable place in the market.

The people who are making the real dollars are those who apply the Keynesian Beauty Contest (KBC) hypothesis to T/A.

More details can be found through Google or on Wikipedia here:

http://en.wikipedia.org/wiki/Keynesian_beauty_contest

The initial hypothesis (from 1936) was that people should not price shares based on what they think the fundamental value is, they should price on what they think everyone else thinks the fundamental value is. This can continue recursively to more and more levels (i.e. price based on what you think everyone else thinks, everyone else thinks, everybody else thinks, etc..) A beauty contest is used as the example of how this should be approached.

If you believe (like we do) that HC has a material impact on the price of **certain** stocks on the ASX, then you can apply the KBC hypothesis to this knowledge also. I emphasis 'certain' stocks as they are very limited in number. You may actually be doing this already.

A more modern application is to use the KBC on T/A and thus trade based on what you think the technical analysts think the pricing should be. This is what a number of investment banks do in their algo models.

There is an argument that applying KBC on T/A is just T/A in a different form (i.e. if I think the technical analysts think there is a ascending wedge breakout formation in stock x and trade based on this, then in effect I am following technical analysis rules in the same way they are). However, the key here is from my opening statement that T/As follow 'more or less' the same rules. T/A is so complex and there are so many variations, indicators, etc. and such different levels of expertise amongst practitioners, that profits can be made as a result of the variance.

For example, taking this back to CNP... In the recent run-up do you think that all of the T/A practitioners perfectly timed their entry into the stock and were able to perfectly time their exit based on technical analysis? Of course not. Some got it a lot better than others and if you are a T/A practitioner you will know into which camp you fall.

This is not a criticism. As I said earlier, it can be a very profitable methodology.

However, the guys who made the real money in CNP are the ones who applied KBC theory and said "What do we think the aggregate technical analysis viewpoint is in CNP and how can we trade the variance?" You need a black box to do it, but you'll recognise the guys who built the box next time they burn you away at the traffic lights in their new Ferrari.