The blogger at Big Picture has been ragging on Larry Ribstein and I over our view that the so-called 9/11 options aren't exactly a scandal. He's challenged us to put our money where our mouths are. Larry's done a fine job of answering him, which I'll just "ditto." But I should add that it's hard to take seriously anybody who would hawk technical stock market analysis.
Larry and I might be wrong about the 9/11 options. It's a matter of opinion. What isn;t a matter of opinion is the validity of technical analysis. It has NONE. Zero. Nada. Zilch.
Charting does NOT work, because securities markets are weak form efficient. The weak form of the Efficient Capital Market Hypothesis posits that all information concerning historical prices is fully reflected in the current price. Put another way, the weak form predicts that price changes in securities are random. Randomness does not mean that the stock market is like throwing darts at a dart board. Stock prices go up on good news and down on bad news. If a company announces a major oil find, all other things being equal, the stock price will go up. Randomness simply means that stock price movements are serially independent: future changes in price are independent of past changes. In other words, investors cannot profit by using past prices to predict future prices. Consistently, empirical studies have demonstrated that securities prices move randomly and, moreover, have shown that charting is not a long term profitable trading strategy. For an accessible defense of this proposition see Burton Malkiel's Random Walk Down Wall Street.
To the extent behavioral economics calls the ECMH into question, it is mainly the semi-strong form that is implicated. The weak form - which is the form that disproves charting a.k.a. technical analysis or whatever name its proponents want to run out this week - remains essentially unchallenged.
Indeed, even younger and less developed stock markets than the US capital market have been shown to be weak form efficient. See, e.g., http://papers.ssrn.com/sol3/papers.cfm?abstract_id=551102 (United Arab Emirates).
Even studies that claim to have found one or more weak form inefficiencies in the US stock market. See, e.g., http://papers.ssrn.com/sol3/papers.cfm?abstract_id=7129) concede that "with real transaction costs no significant abnormal return can be obtained from investment strategies that take advantage of this effect." Even studies of less efficient capital markets than the US (e.g., Russia) find "insufficient evidence to suggest that it would lead to a profitable trading rule, once transaction costs and risk are taken into account." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=302287
A comprehensive study of the question by Amsterdam economist Gerwin Griffioen concludes that: "for the U.S., Japanese and most Western European stock market indices the recursive out-of-sample forecasting procedure does not show to be profitable, after implementing little transaction costs. Moreover, for sufficiently high transaction costs it is found, by estimating CAPMs, that technical trading shows no statistically significant risk-corrected out-of-sample forecasting power for almost all of the stock market indices." http://papers.ssrn.com/sol3/papers.cfm?abstract_id=566882.
In sum, no matter what you call it, it doesn't work. Period.