OPENING POSITION
December 1997 

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  This month, the STOCKS & COMMODITIES interview takes a different tack. Longtime readers know that our interviews feature technically based traders or analysts offering insights into technical analysis and trading based on their years of experience. Instead, for this month's interview I ventured into the rarefied and mysterious world of academia, a place where technical analysis tends to find few supporters. Meet Andrew Lo, Harris & Harris Group Professor of Finance at the Massachusetts Institute of Technology's (MIT) Sloan School of Management. Lo is director of MIT's Laboratory for Financial Engineering and founder of Sloan's Track in Financial Engineering. Academia may not be that warm a place for technicians, but it does have one friend there. Take a look at the interview and see what you think.

I wouldn't commit a chunk of the magazine to someone who believed that technical analysis has nothing to offer. As you might guess, Lo has a keen interest in technical analysis, and I found this interview to be a very thoughtful piece, one that reflects a unique blending of the research being done in the ivory towers of academe that combines the influence of a scholarly viewpoint as well as real-world experience.

Sometimes -- and you might have noticed this -- the academic view and the real world don't go hand in hand. However, this doesn't mean that we should be disrespectful of the academic community. Key to the continued acceptance and advancement of technical analysis is understanding how the academic community looks at our field and understand their criteria for acceptance. That way, technical analysis will gain further inroads into both the investment and the academic worlds.

This is an important point. Remember the old saw about how you can't understand another person's world until you walk in their shoes? I liked conducting this interview because I gained a real understanding of how the academic community, and Lo in particular, views the work we do. The article does have some academic-speak -- we can't get around that -- but there is a real candor throughout our discussion that I found quite refreshing, and I think you will too.

This month, we also have an informative and insightful piece from noted technician and author Martin Pring. In "Reverse divergences and momentum," Pring explains one of the ways he views the relationship between momentum and price. The classic approach is to watch for divergence between price and momentum, which indicates that a market is losing momentum -- the precursor to a trend reversal. Pring notes that the failure of price to confirm the action of momentum can also be viewed as an indication of a trend reversal. His reasons? Well, I don't want to steal his thunder, so you'll just have to read the article.

Momentum is just one of a host of technical methods to choose from, and it can be a little overwhelming to try to understand them all if you're just starting out. In my personal trading, momentum is a very important component; I would recommend mastering the concept, as doing so could be of great value. We technicians follow a saying: The trend is your friend. As far as I'm concerned, though, I would have to say that momentum is my best ally.

Trade well!