Patterns:
The Hidden Market
Wall Street quants insist the only
sensible method to measure price movement originates in their narrow
market view. Through fundamental analysis, they envision a rational
marketplace where the balance sheet alone determines the guiding value of
each equity. When price dares to rise above this arcane measurement, they
attach a negative label of overvalued to pull it down.
Alternatively, when their clientele fails to bid up a cheap issue, it must
surely be an undervalued bargain.
These so-called experts miss one of the
great truths of this market game. Regardless of our beliefs, we are all
just fleas on the elephant’s back. No single discipline can hope to
capture all the infinite forces pushing each increment of price movement,
direction and momentum. In fact, the true failure of fundamental analysis
stems from this lack of required inputs.
Adherents of technical analysis have no
place in this pleasant world, devoid of the twin pillars of greed and
fear. So quants often shun the study of price charts and relegate it to
the status of voodoo and witchcraft. While TA slowly colonizes this Wall
Street mentality, it will always remain the less traveled path. But its
phenomenal power to accurately predict market movement ensures its
longevity.
The vast majority of destabilizing and
supportive market energies remain hidden from individual traders and
investors. Insiders quietly manipulate news to protect option positions.
Analysts push stocks so their trading departments can unload inventory.
Operating failures pass through accounting magic and disappear. As a
result, any subset of this market information universe has limited value
unless it meets one important test: it must stand alone as a fractal image
for that entire market.
Pattern analysis begins with the simple
observation that all market activity reflects itself in the fractal
properties of price and volume. Stringing together a time series of these
small bits of information creates a profound visual representation: a
display of both current and past outcomes for all interactions of infinite
market forces, seen through the eyes of all participants.
As you may have guessed, this complex
mandala is also known as a price chart. And the patterns they weave often
contain almost mystical power for price prediction.
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| Patterns provide the
clues as smart money exits well in advance of important events. On
June 25th, software developer Parametric Technology broke
above a 3-month base to new all-time highs. Rather than continue
this powerful breakout, it immediately reversed, dropping on no
news. 5 days later, PMTC issued a pre-announcement that earnings
would fall significantly below estimates. |
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