How Is This Possible In A Random Market?
We continue to have great success with the High Probability Target Zone (HPTZ) Methodology, and January was no exception, demonstrating once again what is possible with technical analysis.
These charts however beg the question: if the markets are random, how is it possible to pick targets with any consistency?
I admittedly don’t have solid 100% proof for an answer, but I do have thoughts on some possible contributing factors.
WHY IT WORKS
Efficient Market Theory
The basic premise of an “efficient market” may have some influence. While we primarily think of this in relation to economic theory, it could also be carried over to technical analysis.
We have a multitude of technical tools at our disposal and each one gives us, or is measuring from, a different perspective of the market.
Channels identify levels of market support and resistance, a range of movement from the market. We expect the market to bounce back and forth between the support and resistance until it breaks out from it.
In our support and resistance example below, what is the most efficient way for the market to hit each of blue and grey channel resistances?
#1 points to where the most efficient place for this to occur is, and offers a potential target if the market lifts again.
#2 & #3 are also considerations if the market drops off, both offering places of increased market efficiency
Bollinger Bands (BB’s) also bound the market, but slightly differently, dynamically moving with market input. These can be used several ways, but again in general they provide a range for the market to move between, similar to channels.
Again we can see examples of efficiency where the market touches areas of multiple BB’s crossing.
BB’s also offer target level considerations, as marked. A drop off could see a move to the lower BB. A lift could reach any of the upper BB’s, and they give us target locations to consider.
Another common tool used is the moving average. Regardless of the period, they all behave in the same manner, with the market oscillating around the MA, moving away from and then back to it.
Here we can see the moving averages giving us target levels to consider. While they certainly are not perfect for calling an exact price level, and you are going to have to adjust for future movement, they do offer guidance for places to look for the market to move to.
We know all the above is occurring at the same time and the tools are measuring different perspectives of the same action.
The most efficient way for all these to occur is if they do so at the same time. When they do, it gives us potential areas to look towards for the market to move to.
Only three different tools have been used to demonstrate the example. Each of them on their own offered locations for potential market movement; together they can give more guidance.
The HPTZ Methodology uses the above plus several more. Fibonacci theory, the Elliott Wave Principal, Gann, and Market Geometry are all overlaid and integrated along with classical technical analysis.
Where these all tell a similar story, where the underlying map and the projections give us confluence, is where we look for targets; and these are the most efficient places for the market to move to.
Computerized Algo
Algorithms have taken over the stock markets. The New York Stock Exchange and NASDAQ agree: More than three fourths of all trading volume is automated, driven by program traders, electronic market makers and computerized speculators. James MacGregor, Vice Chairman, The Abernathy MacGregor Group
While there are other ratios to use with market analysis, there is only one Fibonacci ratio. A 0.5 or 0.38 retracement is exactly that, no matter what you want to work it through.
So you have an unlimited number of algorithms all using a limited number of technical methods. When they are all let loose on the market together, they drive the market to technically significant market levels that can be predetermined by using the same basic analysis.
A Force of Nature
The Fibonacci growth and decay sequence is said to be found in nature. Elliott Wave theory is an excellent example of Fractal Theory, which Benoit Mandelbrot showed to be a basic building block for all we see around us.
Cycles from nature, seasons, planetary, are all said to have an influence that can be seen and measured, if not at least predicted, to some degree.
It was once believed that a lot in nature was completely random. It has been shown however that this isn’t the case, rather nature is chaotic, and there is a big difference.
While we say the weather is random, it can be predicted, forecasted (sometimes better than others) and is actually a chaotic system, not a completely random event.
Do the markets also then, follow in the same footsteps as nature?
Conclusion
I really don’t have an answer, and I am personally inclined to think that it is probably a combination of all the above; plus more that I’m not even aware of.
Whatever the reason, I have been showing now for several years that the market will move to places of technical confluence. The trick is determining which ones…..
If you have some thoughts about it yourself, please shoot me an email and let me know what you think.
Thank-you
& Good Trading
Andrew J.D. Long, MFTA
Article from TRIGGER$ Feb. 2015 FEE PUBLIC EDITION Available
UPDATED FEB 14th, 2014
chart from above identifying potential market moves
and here is what the market did...
Lifts to / through technical confluence, moves on to UBB target.