The worst of the economic problems start unravelling after the market has had a huge correction, typically after 60-70% of the market drop has already occured. None of the serious economic problems in the history have occurred until the monthly trend in the stock market has turned down. I dare ya ! Show me one !. Every economic problem that occurs while the market is in a major bull uptrend, are merely "wall of worries to climb". While everyone knows about the wall of worry cliche, very few really believe in it. Why do many use fundamental analysis to justify their trades ?
That's because, fundamental analysis provides that rationality, that logic, which the human brain can comprehend and more importantly the certainity in the analysis. Whereas technical analysis is more about odds and probability than certainity, which we humans dislike. It's more appealing to the human mind when it reads "The subrpime market problems.....the LBO debacle..the yen carry trade crises...the credit collapse...oil problem....all this can only mean that a recession is likely and hence the stock should follow". I bet it gives a warm and fuzzy feeling, when one goes to the bed reading such a report. Stock markets are inherently irrational and hence a rational methodology (such as fundamental analysis) to analyze and predict it is doomed to failure. And many are lured to fundamental analysis cuz it's easy (all you need is a bag of popcorn and CNBC
). Whereas technical analysis is difficult to operate on cuz one need to make bets on 50-60% probable odds. But we need 100% certainity. When one starts mixing technical analysis with fundamental i.e using fundamentals to justify the technicals, you have entered an even more dangerous territory !. Unless you have some information that all those billion dollar trading desks haven't seen or heard, you don't have an edge.
Yesterday morning, i posted something about a slingshot reversal. Most folks probably yawned at it cuz it's a 60% probability kind of thing. Most expected a bounce and failure. Had you played for a bounce, what's the worst that could have happened ? You would be sleeping on a bag of profits, which is always a worry
Now when the bounce did not fail and closed above the ES 1530 resistance, what does that tell ya ? It merely tells that the odds the move not failing here is high and hence the risk/reward is better by staying long, had you played the bounce. Should one go long at the close ? - Nah, the risk/reward is bad there and the potential for whipsaw is very high. So if we rocket another 5-6 points higher, will anyone go long ? - No, they will keep waiting for the next short setup, unless one is a daytrader. It's one heck of a chessgame !
Sorry for the rant.
Edited by NAV, 11 July 2007 - 10:48 PM.
