Category: Your Money

The Psychology of Technical Analysis: Ch. 9-11

PTAFinancial markets exhibit crowd behaviour. A crowd is a dynamic system. A dynamic system can be expressed as a system of spirals. Hence, it follows that if we can identify the presence of an unstable cycle in price movements, we should be able to calculate the precise price targets. The life cycle of a positive shock goes something like this: the initial market reaction that establishes a new trend or the resumption of an old one, a reversal under a spiral mechanism and finally, a jump in a dynamic move. The final jump is 2.618 (the Golden Ratio) times the length of the last wave of the base pattern that precedes it.

The actual shape of a price pulse will be distorted by higher-order trends. However, in practice, any price movement subdivides into there phases: the first two phases constitute either a top or base pattern. The third phase consists of a dynamic impulse wave. Subsidiary fluctuations occur because this three-wave pattern is repeated at all levels of the hierarchy.

This is one of a series of posts reviewing The Psychology of Technical Analysis by Tony Plummer.

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Indian consumers still most bullish

Consumer sentiment in the United States was weaker than in the second half of 2009 at the height of the global recession.

Globally, consumers plan to tighten their belts in coming months for everything from stock investing to buying clothes, taking holidays and upgrading technology, after being slightly less cautious over the past 12 months.

Indian consumers were still the most bullish globally but less so than in the first quarter.

via Indian consumers still most bullish –

The Psychology of Technical Analysis: Ch. 8

PTAGreed is the fear of missing further profits.

The objective of a crowd in the stock market is to influence prices: the bullish crowd will try to force prices up while the bearish crowd will try to force prices down. The sentiment of the crowd usually turns prior to price reversals. Hence, just before market peaks, sentiment will begin to deteriorate as the percentage increase in price falls.

The price-sentiment limit cycle is prone to shocks. Shocks occur because of a sudden divergence between current price movements and expected price movements. Shocks can be either pro-trend or contra-trend. Pro-trend shocks almost always destroy the unsuccessful crowd. However a contra-trend shock will initially cause prices to fall which results in falling sentiment. Eventually, the fall in prices begin to slow and encourages bear closing. This, in turn, causes prices to rise and hence a reversal in sentiment.

The disintegration phase of either a bull or bear cycle will occur very quickly. The fear of not making profits is of a different order of magnitude from the fear of actually losing money. This implies that investors prefer to hold stock rather than short positions. The long-bias means that when a bear market begins, not only do very few investors anticipate the fall, but also there is very little resistance to falling prices. Therefore, bear phases take a shorter period of time and are steeper than bull phases.

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