10.12 The market has opened down below 4600, it's actually on support at 4589. I imagine there'll be some bargain hunting for an hour or so now.
I've been thinking about why charting works in relation to writing a couple of posts about books I've found interesting.
There's a point of view that charting doesn't necessarily work at all but instead it's the discipline of managing risk which is what makes money for technical traders. I don't agree with this but I take the point that risk management, which is a huge area, is probably more important than whatever method a trader might use to enter and exit a stock.
Getting back to the main point, why should historical price patterns be predictive? This is beyond belief to a certain type of mind because they see it as some kind of financial astrology. By contrast, I see the graph of price action in a stock as an unprejudiced distillation of the information available to all participants at the time in relation to the stock, the sector, the broad market, the economy etc but also, and more importantly, as a reflection of the emotional state of those market participants. Which is where the predictive element comes in.
Anyone who has thought about their own life will see individual patterns that continue to recur and of course, it's much easier to see those patterns in the lives of friends and family. I play social football with a bunch of friends and I know which player will make the right pass in a given situation, which one will panic, which one will misread the situation....again and again and again, for years. The same thing goes for the shape that the conversation will take after the game. It takes will and determination to change something you've identified as unsatisfactory.
When it gets to a public or even herd situation, such as when you're trading in a stock, it seems as if the most ancient part of the brain takes over. Despite years of experience, I've had to fight hard to lose the temptation or even compulsion to leap into a stock driven by euphoria or to panic with the crowd after a series of bad days or even to complete the simple act of buying at my chosen support level after a few days of retracement. I've held on to stocks long after they've breached my stop because I couldn't bear to crystallise the loss and finally capitulated at the worst moment. The list goes on.
I've just talked about the extreme situations because they're the easiest to identify with but there are lots of less emotional situations which constantly crop up. For example, there's the arm wrestle around support or resistance, the slow tussle and then the quick surge. There's the slowing of momentum in a trending stock, as if a thrown ball was reaching the top of its arc and then the typical sort of retracement as previously ironclad confidence is disturbed by whispers of doubt.
Until human nature changes dramatically, markets are going to behave in much the same way. Charting is an attempt to measure these behavioural patterns, to gauge the mood of a stock or market and predict the likely outcome based on past experience. There are any number of methods and which one you favour seems to be a matter of personal taste. As far as I can see, every approach out there is pretty clumsy but still has the massive advantage of acknowledging that markets are not and have never been rational.
It's 11 am as I finish this section and the market is not managing to bounce much. Most of my stocks are performing well, with the exception of Fmg which is slightly firmer. Back later.
1.34 The market has bounced back and sits above support at 4609 which is lower by 24 points. Not a lot has changed since I've been out. Fmg is still firm but Awe, Djs, Ozl and another stock I shorted yesterday, Tse, are all lower.
I'm still long Paladin but only a few and I'm debating whether to complete my buying. I'm less confident now even though it's holding above support and provides a better entry. Here's the daily chart.
2.49 Most of the Asian markets have reopened and they're flat to slightly higher, failing to react to overnight weakness. It's likely that many of the market participants are away but despite all that, it's still having a steadying effect on the Australian market so that the Xjo index is down just 16 points now and still showing plenty of resilience.
Although I'm steeling myself for the possibility that the index resumes its rally, the 60 minute chart provides some ammunition for the bearish case. The opening drop this morning is not a completed sort of pattern - there's too much momentum - so the market probably needs to go lower for this correction to be complete. My point is that even if you're looking at the bullish scenario, there's short term weakness ahead while the bearish picture has this morning's move as the first serious crack before some genuine selling emerges.
3.05 By the way, I'll post something about interesting books next week. The one I'm thinking of writing about is "Trading by the minute" by Joe Ross.
3.08 I've just flicked over to the website and I see that this book has been revised and re-published as "Day Trading".
3.51 The intraday rally has faded and the index is down 29.
I've found another bearish position in Incitec Pivot. Short at 342 with a stop in the mid 350s. There was a sell signal today and the previous sell down from 365 to 338 also overlapped recent highs implying that a clean trend was over. I'm hoping for a second leg down to around 320.
4.07 A scrappy day for me, in and out of the office, and now I've got to bolt to yoga which I've missed for the last two weeks. Meanwhile, the match is approaching and the Spi is getting hammered ahead of it. Even Fmg has eased back and might close at about 504 after hitting 510 in mid afternoon.
It's been a choppy week too and I'm happy to have scraped a few dollars out of it.
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