Diary of a Financier

Technical Breakouts & Breakdowns: Tidal Phenomena

In Capital Markets on Fri 13 Apr 2012 at 14:16

Technical analysis helps manage the investor psychology that swings an asset about its fair value. It is not a failsafe. Fundamentals are the mooring to which market prices are chained, but the tide ebbs & flows in response to the universe of variables around it:

Tides are the rise and fall of sea levels caused by the combined effects of the gravitational forces exerted by the Moon and the Sun and the rotation of the Earth. The times and amplitude of the tides at the coast are influenced by the alignment of the Sun and Moon [cyclical factors], by the pattern of tides in the deep ocean and by the shape of the coastline and near-shore bathymetry…

Tidal phenomena are not limited to the oceans, but can occur in other systems whenever a gravitational field that varies in time and space is present [i.e. capital markets].

Albeit infrequent, charts do break-down when technical indicators unexpectedly reverse and/or classical patterns fail. These breakdowns convey a lot of valuable information. Sometimes the fundamentals have changed, altering the depth of an asset’s mooring. Other times the environment has changed, modifying the slack in an asset’s chain or the depth of the ocean (fluctuations in security-specific or systemic valuation multiples).

~~~~

Closing this volatile week at intraday lows has imparted a ringing parting-shot. SPX, ES & SPY will rest on their bull trendline support over the weekend. While longer-term weekly & monthly fractals form tops in unison, the daily chart requests one last hurrah before the tide goes out… and I expect to be swimming for another two weeks.

–Romeo

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