The market is sure to go up or down or sideways but never left on the chart.
Technical analysis is much decried and there is plenty of evidence that charting is mumbo-jumbo.
After all the whole of the stock market and much of finance depends on the random walk theory that says the past is not linked to the future.
Try pricing options without that point of view and you will lose all your money in the same way as a blackjack player that doesn’t count cards will go broke using his gut to navigate the game.
Why fight those facts?
I maintain charts are great for predicting the past. This sounds like a joke, because it is, but it is also the key to using charts as they contain information otherwise opaque about what the story has been so far. The past is not distinct from the future as anyone catching a ball can tell you, or the nightly news demonstrates.
The Dow Jones index and thereby its chart is random at many levels. You can take moves throughout the day, week, month etc and build a bell curve distribution of the returns and their various time sliced permutations and see for yourself that there is no repeating pattern you can trade robotically for a profit. That is because there are buildings full of math PHd’s who do data analysis and this vein of profit has long been mined out.
However when you look at the chart, its clear there is trend and noise. There have been trends and that is clear. The chart is not completely random, it’s bounded by ranges for a start. Yet it is a kind of random, a Brownian random, a random curated by unpredictable interactions producing a impure kind of noise that will lay you as low financially as any other the other randoms out there from ‘white noise,’ ‘black noise’ to ‘pink noise.’
But look at this:
(Dow chart)
Can you look at this and not go, oooh!
So lets remember the market can go up, down, or sideways. The implications are quite large if the market goes up or down from here. Let’s dangerously discount sideways for now.
I’m bullish right now and recklessly so, having bought the Brexit slump, I’m feeling undeservedly smart.
I just can’t help feeling we are in for a breakout. In a random walk situation, this is a 20% chance in any sideways channel like the current one.
It is of course pathology to be most bullish at the top of a rally, so I’m fully aware the Dow may slap me down even as this article gets posted.
Effectively I’m expecting a Dow breakthrough to 20,000. If that happens, that will mark the opening of a new phase in the world economy.
That breakout would be the beginning of a long rally, a new boom bust cycle will have begun.
How is that for a wild prediction?
The bears will see in the chart an imminent pull back. The perma-bears will see this peak as the final ‘golden calf’ insult before the crash of destiny strikes and washes humanities fiat money away.
That blasted crash is just not going to happen, unless the meteor really does show up for the Presidential election.
What might happen is Europe, America and Japan will step up their monetary stimulus again. China will get its economy on the rise. The Brics will rally back and the world economy will ignite fueled by cheap money.
After all that is what is meant to happen.
The Brexit has kicked the inert politicians into the awareness that unless they get cooking in their democracies, they’re going to get trouble from their electorate who are bored by the status quo.
UK political heads have rolled like French aristocratic heads in 1793 and it is a wakeup call to Europe to get on the economic offensive.
The Fed has reeled back from hiking interest rates, Japan looks set to send the money helicopters flying. If the risk asset party starts the Dow would see a breakout from this long established channel and head north.
The Dow chart shows the story so far and is now poised in a pivotal position likely statistically to show a correction, but if we get the 1 in 5 breakout rally it will be a strong indicator that the post end-of-QE malaise is over.
If it is, its big!