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
15 June 2010 - Fibonacci in the News

The .618 ratio is a fundamental structural component of reality, both the non-financial variety and the reality of the world of finance. In this report we explore the significance of some very recent appearances of this key ratio in the content of the European debt crisis.

20 May 2010 - Decrypting the Headlines

We explore here the world of hidden meanings in financial headlines, from the partially submerged bias to the deeper contrarian message 

07 May 2010 - A Bear Market is Not a 'Trading Glitch'

There were so many antics surrounding the response to the 6th May selling climax that I hardly know where to begin. So let us start with some history and then work our way forward in time.

The Continued Risk of Deflation (Video) - 19 Apr 2010

 This video cuts through the cheerleading and examines the validity of our so-called "recovery." High unemployment, contracting credit, falling tax receipts, surging foreclosures, record delinquencies, stagnant CPI,  ...these are not the characteristics of an economy on the mend, an economy that has been "re-flated." These are the characteristics of a deflation induced depression. To view the various economic slides in PDF format click the link: The Continued Risk of Deflation (PDF)

The continued Risk of Deflation (PDF) - 19 Apr 2010

 To view the full webcast presentation please click this link: The Continued Risk of Deflation (Video)

Government, Galaxies, and the Greater Good - 08 April 2010

Here we investigate the role that the collective consciousness plays in determining the fate of nations and of government programs. In particular we explore the history of the effect that bull and bear markets have had on the manned space flight program.

On the US Dollar, News, and Technical Analysis

 This report looks at the contrast between news,  fundamental analysis, and technical analysis as it relates to recent trends in the US Dollar

CPI Goes Negative - 19 Feb 10

Government data released Friday showed that a closely watched measure of inflation fell in January for the first time since 1982. We can add this CPI data to a list of economic indicators warning of a growing risk of DE-flation.

On Capitalism, the Fed, and Bernanke

Those held accountable for major screw-ups will say extraordinary things in an effort to get off the hook. The past couple weeks have seen two dramatic instances of this phenomena.

Immediate Openings: Scapegoats Wanted: 09 Dec 09

 The dynamics of human nature on the scale of the collective consciousness generates a self-sustaining cycle of alternating periods of increasing positivity ( bull markets ) and increasing negativity ( bear markets ). These cycles permeate all aspects of human endeavor.

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