WZ's Observations

Technical analysis is not another way of doing fundamental analysis. It is not another way of getting the same information. A fundamental analyst studies the various physical supply and demand factors in order to gain insight into the physical pressures that drive price trends. Technical analysis gives insight into the forces of human nature that drive price trends in the markets.

For a fundamental analyst, bullish fundamentals should only drive prices higher, and bearish fundamentals should only drive prices lower. A technical analyst recognizes the primacy of human nature and the role that emotions play in the markets. A technician has recognized that a bull market is not simply capable of ignoring bearish fundamentals and bearish news, a powerful bull market will turn bearish fundamentals into bullish factors and rally accordingly.  And similarly, a bear market will ignore bullish news. In fact, a technician can confirm the direction of the price trend in the market based on what type of ‘news’ the market is ignoring. What determines which type of news the market will ignore - bullish or bearish? The determining factor is the collective mood of the market.

A bullish collective mood will drive a price trend way beyond levels justified by the ‘fundamentals.’  And a bearish collective mood will drive prices way below levels predicted by the fundamentals. The dynamic here is not the rational analysis of individual investors buying based on new information. The dynamic consists of investors buying because they see others buying. Price discovery is herding behavior, the fundamentals are secondary, and the collective mood is primary.

There is a limit to the degree that herding behavior can drive prices. Prices in an up trend will eventually top out and reverse lower, and prices in a down trend will eventually bottom out and reverse higher. However, careful analysis of price trend reversals reveal that trends do not reverse because the fundamentals change. For example, a bull market will never peak and reverse lower because of a surprise bearish news story. A bull market will only peak on an even more bullish piece of news that fails to maintain the up trend, and a bear market will only bottom once an even more bearish story fails to drive prices lower.

This sudden loss of trend can be quantified through a momentum divergence indicator like the RSI or a sentiment divergence indicator like “Market Vane.” This loss of trending power can be confirmed visually in the shape of a candlestick reversal pattern. And the price at which the peak or trough occurs can be predicted through a system of chart pattern analysis like the Elliott wave system. These are the various tools of technical analysis.

Observing Human Nature
There is yet another approach to technical market analysis that derives only indirectly from price chart patterns. This other approach derives from the fact that the collective mood of the market creates both the price trend and the nature and content of the news. This other approach is a close study of specific incidents that reveal herding behavior creating the nature and content of the news.

What one looks for in this regard are logical disconnects. For example, something that should be bearish is widely touted as justifying higher prices. For those caught up in the emotional content of the trend no disconnect is perceived. “It is all good.”  But for someone with a modicum of objectivity, not every news story makes a great deal of sense. Incidents where a bearish development is especially celebrated as bullish - such disconnects are especially prevalent in the final stages of an up trend. And stories of ‘babies getting thrown out with the bath water’ are most common in the final stages of a down trend.

This approach to market analysis is frequently a magnet to intense criticism. First of all, the most egregious examples of the collective mood manufacturing “news” occur when the collective mood of the market is at its most intense - intensely bullish into peaking action and intensely bearish into bottoming action. Suggesting that a major bull market is about to end will never make one popular. In a bullish mania pointing out the logical inconsistencies in a bullish news story will invite allegations of a bearish bias. One will be accused of cherry picking the news to fit one's bearish views. One may even be consigned to the category of ‘those who missed the up trend and so are full of sour grapes’.

It is nevertheless fascinating to see how fluid the truth of the news can be under the pressure of a herding behavior driven collective mood. When we spot a particularly dramatic example of this process by which the collective mood creates news, we will report on it in this section.  Our goal is not be to clever or controversial. Our goal is to contribute insight into how markets move, how up trends peak, and how down trends bottom. Our goal is to give insights into the world as seen through the eyes of technical analysis. And the usual tools of technical analysis can help us identify those periods in time where such insights are likely to be most readily available.

WZ's Observations
08 Feb 2017 - Webcast: The Interface of Markets and Governments

This webcast explores a market based theory of government in the light of current events and recent market moves. We explore the implications of this theory for a few markets:

·         The Dow Jones Industrial Average and the Nasdaq

·         Crude Oil and the WTI minus Brent spread

·         The US Dollar Index

The slides from this webcast are in the entry below

Slides from the 08 Feb 2017 Webcast

These are the slides used for the webcast on markets and governments 

12 Jan 2017 - How 'Doctor Who' Explains Brexit

These ‘observations’ reports employ insights from technical analysis to explore the nexus of current events, popular culture, history, and geo-politics. This report employs insights from technical analysis to explore how the British ‘Doctor Who’ science fiction series might help explain the Brexit vote and its repercussions. The popular entertainment of a nation always reveals the collective mood of that nation. And science fiction by its very nature has a relatively free rein to more accurately explore and reflect the collective mood. This report explores why a closer look at the popularity of the ‘Doctor Who’ series might have made the Brexit vote a bit less of a shock. And a deeper understanding of the vein of collective mood that ‘Doctor Who’ is mining might also help better prepare us for what lies ahead.

24 Oct 2016 - AT&T and Time Warner - Peaking Action?

In  January 2000 as AOL and Time-Warner were getting togther, not a single analyst saw anything that could possibly go wrong. Yet that marriage quickly gained the status of the worst merger of all time. Now as AT&T buys Time-Warner we are hearing the same rosy rheotric we heard back in January 2000. If there are problems ahead, we will only be able to detect them in the price action. Forget the analysts. They tend to instantly like any buy-out. Let us employ this opportunity as a technical tutroial and look to the price charts.

20 July 2016 - World Energy Usage

This is not a work of tecnical analysis. This is an observations piece. And the observations here involve the deeper significance of certain price relationships in energy trends that have much greater importance than mere short term economics.  

24 June 2016 - EU Zero, Cultural Integrity 1

This post is the sequel to and elaboration of my last observations piece. It should be glaring obvious to everyone by now that the Brexit vote to leave was a decision that was motivated by neither financial nor economic considerations. However it is a big mistake to chalk it up to low brow and uninformed populism.   

23 June 2016 - a new perspective on the Brexit

Technical analysis can help reveal a deeper understanding of the markets, and of collective human behavior in general. In thie piece I employ what we have learned from technical analysis to generate a new perspective on the Brexit situation. 

21 Jan 2016 - Dilma versus Angela and the magazine cover story syndrome

The dramatic juxta-position of recent cover stories on Dilma Rousseff and Angela Merkel does not align with the underlying reality. This report suggests that the ‘magazine cover story syndrome’ strikes again – that recent cover stories in “Time” magazine and “The Economist” have the situation upside down. As usual.

13 Dec 2015 - OPEC and the 15 Year Commodity Cycle

The superficial exogenous view of market price action is that OPEC news causes price trends. A closer look reveals compelling evidence for an endogenous view of market price action. In the endogenous price trends arise from the dynamic nature of the markets themselves. No external stimulus is needed to induce price trends, and the price trends are cyclical in nature. This brief piece looks at this exogenous versus endogenous issue in terms of OPEC and the 15 year commodity cycle.  

08 Dec 2015 - The Allure of Negative Interest Rates

Negative Interest rates on government bonds and central bank deposits can strike one as an 'Alice in Wonderland' through the looking glass degree tear in the financial space-time continuum. It appears to stand 5,000 years of interest rate history on its head. So why the tremendous investor demand for negative rates? This report places negative interest rates in the context of long term historical trends - and the post 1999 golden age of the speculative bubble. I employ Adrian Brody's role in the 2010 film 'Wrecked' as a parable to help flesh out the issues.

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