Considering
the Whys of the Whens:
Discover the mind of market participants using A’s and V’s
When viewing
stock, commodity or index charts, it is quite easy to become
caught up in the "Technical" side
of technical analysis. An overdependence on the lines and squiggles
may manifest
in the lure of adding more and more indicators to your charts in
the hope of bringing enough firepower to bear that the charts must
eventually reveal their secrets to you.
My
students hear over and over again that the moves of the markets
are caused by people and not numbers. To clearly
understand what
the charts have to tell you, always "Consider the whys
of the whens." When price makes an extraordinary move on
clearly higher volume in a mature trend, it is vital to ask, "Why?" In
the daily chart below you will see such a situation during September.
As
selling escalated in late August and early September, notice
that volume was rising over the same time period. On the day
of lowest intraday price, volume reached its apex.
Now we must
explore the whys behind the price and volume moves we’ve observed.
The down-trend that concluded in September
was quite significant, with an overall price drop of nearly
$12. As
the dollars rolled off, there were three groups of market
participants who all experienced differing emotions and
motivations.
First,
a group of investors/traders went long during the preceding rally
of July, and after the reversal (early
August), in the
hope that it was just a temporary pull-back. As prices
continued to
drop into August, these folks became more and more anxious
to close their long positions. Some did all along the price
slide.
A second
group of people went short in July and August. With further
and further prices drops, these people surely were looking
for places
to cover their short positions and realize profits. All
the while, a third group–let’s call them the vultures–were
watching prices
fall in the expectation of entering long at bargain prices.
You
can see that selling became more and more powerful toward the
end of the down trend. This is apparent in both
price and volume.
The two simple trend lines drawn on the above chart–one
of price and the other of volume–serve to quantify the
situation. Once
the point of critical mass on the selling side was reached,
the long buyers opening new positions, and the buyers covering
their
short positions, began to propel prices back up the other
side
of the valley, and the beginning of a new bull phase. The
Vultures also dropped off the fences to get in on relatively
cheap prices
also contributing to the new flood of buy orders.
A’s and V’s
The
scenario described above may be seen on the charts as what
I call "A’s and V’s". The visual configuration
of the "V’ in
price and the "A" in volume, over the same
time span, is a simple tool that may be easily used
to point
out the underlying
psychological mechanisms of varied groups of market
participants as they apply to trend reversals. In an
up-trending chart, the same
mechanism in reverse will be seen as an "A" in
price and another "A" in volume. On
the chart below, you will see the up-trend reversal,
with the "A" in volume and "A" in
price (within ellipse) configuration. Two down-trend
reversals with their attendant "A’s" and "V’s" configuration
are also shown.
May I suggest that a blind reliance on programmed chart
indicators is not enough? By becoming aware of simple
chart patterns,
such as "As" and Vs", the depth of your
analysis will be vastly improved thus making the indicators
you do
employ far
more effective in identifying profitable entry and exit points.
In the next
issue of The Wealth Factor, we’ll look at two simple yet effective
single-bar configurations called Lincoln’s Hat and Reverse
Lincoln’s Hat.
These bar forms are highly predictive of the direction of close
seen on the bar following the signal. Again, this excellent tool
is based on market psychology first, and numbers second.
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