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
16 Sep 2013 - A Federal Reserve of Paradox

 Why is the Federal Reserve the object of such intense emotions? Is the scorn justified or is there something deeper going on? In search of answers we first examine the historical roots of today’s loathing of the Federal Reserve. We then explore a possible metaphysical basis for the widespread and enduring animosity toward the Fed.

02 July 2013 - Brazil: bear markets and social unrest

 I searched in vain for an article about the unrest in Brazil that mentioned the bear market in commodity prices as a cause, or even a remote influence. Everything else was mentioned as a possible factor except the plunge in commodity prices. I found this quite extraordinary. So to remedy that collective amnesia I have put together a few charts.

19 June 2013 - Is the Illusion that Bernanke is in Control Losing Control?

In previous 'Observations' pieces we noted that human nature prefers the illusion of a higher authority exerting control to the harsh reality that no one may be in control. No one other than the collective mood. And once the collective mood sours all the kings horses and all the kings men cannot put back a believeable happy face on things. In this little note we ask whether the most recent price action suggests the illusion that Bernanke is in control is losing its grip on the collective mood.

23 May 2013 - Analysts Chart Stocks' Voyage to the Unknown

This is a reprint of an article on technical analsys from the first page of the "Money and Investing" section of today's 'Wall Street Journal'. A statute of Mr. Fibonacci is finally pictured in the Wall St. Journal - a long overdie honor! I am also quoted in this article.  

10 May 2013 - Contrarian News

Every once in a while the so-called 'news' is such a clear expression of a bullish sentiment extreme that I have no choice but to report it. This past week there were two such incidents. The first is the new cover of the Economist magazine. The second is the outlandish notion that Natural Gas is a safe haven for commodity bulls.

20 Mar 2013 - Bernanke's Bubble

Our technical analysis indicates that this stock market rally is a bubble and will not have a happy ending. The chart patterns suggest a massive broadening top, or expanding triangle, has been unfolding since the 2000 peak. The implication is that when this current bubble is done inflating the ensuing decline will be larger in scale than the decline from 2007 to 2009. If the technicals are even half right we should be able to find evidence of big problems ahead in the economy outside of the world of technical analysis. In other words we should be able to find a background story that supports the bearish technical outlook.  This webcast aims to supply some of that background.

20 Mar 2013 - Bernanke's Bubble - slides from the webcast

 Slides from the webcast in PDF format

06 Mar 2013 - The War over Natural Gas Prices

We have all grown accustomed to lower Natural Gas prices. North America is enjoying the cheapest Natgas in the world - by a significant margin. Is this situtaion sustainable? The technical picture argues that the longer term trend is up, and that Natgas is now carving out a major bottom. In this webcast we dive into the under-reported fundamental forces that are ready, willing, and able to drive a longer term up trend in Natgas prices.

05 Feb 2013 - The Problem of Spain

If the Euro-zone is the 'Achilles Heel' of the Global Economy, might Spain be the 'Achilles Heel' of the Euro-zone. As another massive speculative bubble inflates in the world stock and commodity markets, we begin looking for problems large enough and intractable enough to be capable of bursting this next bubble. If this currently inflating bubble is going to be burst from something out of Europe, then Spain should definitely be in the running as a candidate. Right now this piece is a background story. However it raises issues that may not remain in the background for long.

05 Dec 2012 - Consumer Sentiment

There has been much rejoicing lately over the fact that the University of Michigan Consumer Sentiment Index hit a new post recession high. So is it time to get bullish on consumer sentiment? This simple technical analysis suggests that the rejoicing may be pre-mature. 

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