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
01 Dec 2015 - Is Deflation the Fed's Self Created Stay Puff Monster

Great enough fear creates the thing being feared. This is an age old truth of human nature. And it is a reality alive and well in today's financial markets. In this piece I explore the metaphysical basis of central bank intervention. And this leads me to explore the case for deflation as the Fed's own self created monster. 

03 Nov 2015 – the 15 Year Commodity Cycle and a Preview of the Year 2016

This webcast is a preview of 2016 in terms of the 15 year commodity cycle. The start of this webcast makes the case for a long standing 15 year commodity cycle. As this will be my third 15 year cycle low as a technical analyst, I then go on to apply what I have learned from previous cycle  lows to a technical  outlook of the risks and opportunities ahead for 2016.

03 Nov 2015 - the Slides from the webcast

These are the slides from the webcast in .pdf format

18 Sep 2015 - The Snake and the Rope
A man goes into a dimly lit shed and in his fear he mistakes a coil of rope for a giant snake. He runs out of the shed screaming and quickly panics the entire village. Out of fear or mere carelessness, one mistakenly perceives something in the present for something seen in the past - a mistake with consequences.

14 Feb 2015 - Five Bulls-Eyes

This is the sister report to my 15 Jan 2015 report "How Wall Street Misses." In that report I updated the long standing inability of Wall Street to forecast crude oil prices. The tools of fundamental analysis have yielded notoriously bad energy price forecasts since Wall Street began coveringpetroleum prices. This is an on-going scandal that has been hiding in plain view. In this report I summarize some of my recent multi-year price forecats in the petroleum complex, using the tools of technical analysis. THe results have been dramatically different than the laughable results out of fundamental analysis.

15 Jan 2015 - How Wall Street Misses

When it comes to forecasting crude oil prices Wall Street analysts have an abysmal track record. What are they doing that is so wrong? This situation provides an excellenet perspective on the critical differences differences between fundamental and technical analysis

20 Sep 2014 - Scotland and the 'Status Quo' Bias

Fans of the status quo should take no solace from the recent “no” vote out of Scotland. The long term trend in the number of sovereign states is still very much pointing up.

26 Aug 2014 - The Great Disconnect

Since early 2012 I have been tracking a major disconnect in the global financial markets that has made less and less sense over time. Over time it has grown from an annoyance to a very serious problem. I refer to the disconnect between price trends in commodities and equities. This report offers a fresh perspective on this historic divergence.

12 Aug 2014 - Russia and the Oil Weapon

The press is fond of citing ‘the oil weapon’ as something Putin may wield against the west if he does not get his way with the Ukraine. Here we discover that the reverse is true. The real ‘oil weapon’ is something that US can exercise against Putin’s Russia.

29 July 2014 - Putin: Villain or Scapegoat?

This report reviews the current vulnerable technical condition of a few critical world markets from the perspective of Vladimir Putin’s recent tactics and larger strategy. I explore the issue of endogenous versus exogenous dynamics in the bursting of a speculative bubble in the light of current events. I also delve into the related issue of why ‘bad things happen in bear markets.’

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