Guys, this really is my pride and joy. The fact that every day of my life I get to turn on a computer and start flipping through charts from all around the world, truly is a blessing. And I’m not just talking about the S&P500 and Apple. I look at Asian stock markets, European currencies, Commodities that range from Gold and Crude Oil to Coffee and Sugar. I’m constantly looking at the bond market and interest rates, both for trading purposes and information as well. I look at more charts on more time frames than you could ever imagine. And there’s a very good reason for that. I’m a technician….
So today I wanted to talk a little bit about the rationale behind all the chart watching. There are three basic premises on which the technical approach is based:
1) The Market action discounts everything
2) Prices move in trends
3) History repeats itself
For the purposes of this post, let’s focus on what the market action discounting everything actually means. To quote the great John Murphy, “The technician believes that anything that can possibly affect price – fundamentally, politically, psychologically, or otherwise – is actually reflected in the price of that market. It follows, therefore, that the study of price action is all that is required. While this claim may seem presumptuous, it is hard to disagree with if one takes the time to consider its true meaning”.
Price action is a reflection of the shifts in supply and demand. If there is more demand than supply, prices rise. If supply exceeds demand, prices fall. Isn’t this simple concept the basis for all the economic and fundamental forecasting? Well then let’s flip that around: We as technicians have concluded that if prices are rising, for whatever the reason, demand must exceed supply and therefore the fundamentals must be bullish. We’re talking about fundamentals in a discussion about technical analysis. Funny right? But think about it. Aren’t technicians indirectly studying fundamentals? Well according to Murphy, most technicians would probably agree that fundamentals are the underlying forces of supply and demand. It’s what causes markets to move up or down. Price simply reflects the bullish or bearish psychology of the market place.
“As a rule, chartists do not concern themselves with the reasons why prices rise or fall. Very often, in the early stages of a price trend or at critical turning points, no one seems to know exactly why a market is performing a certain way” (See: Is Apple Stock About to Crash?). “While the technical approach may sometimes seem overly simplistic in its claims, the logic behind this first premise – that markets discount everything – becomes more compelling the more market experience one gains. It follows then that if everything that affects market price is ultimately reflected in market price, then the study of that market price is all that is necessary. By studying price charts and a host of supporting technical indicators, the chartist in effect lets the market tell him or her which way it is most likely to go. The chartist does not necessarily try to outsmart or outguess the market. All of the technical tools are simply techniques used to aid the chartist in the process of studying market action. The chartist knows there are reasons why markets go up or down. He or she just doesn’t believe that knowing what those reasons are is necessary in the forecasting process”.
The legend John Murphy ladies and gentlemen.
I couldn’t have put it better myself. Is there anything else I really need to say?
Don’t worry about the “why”. Focus on the “what” and “for how long”.