21st July 2022 > > Technical analysis.

tl;dr

Some of the arguments in favour of technical analysis (TA).

Market Snap

Market Wrap

The cost to the UK of servicing the gargantuan amounts of debt incurred because of quantitative easing and the extreme overreaction and panic to Covid hit almost £20bn in June alone. As interest rates rise, and governments the world over start to realise the insane folly of recent policy decisions, markets are unlikely to respond positively.

Curious Cryptos’ Commentary – Larry, Resident Technical Analyst, in a personal email to me

Rejecting technical analysis (TA) as having absolutely no value is a hypocritical position for you, Mark, given you immediately ascribe grounds for it working as a group think mechanism. Moreover, you repeatedly call out numbers like $22,000 as being relevant. Why not $22,001? Because you believe in TA. In fact, your body and soul have been converted to Technical Analysis and your brain is just being a little slow to catch up.

There are plenty of reasons why you might have such a virulent anti-TA view. Ignorance, for one. Wilfulness is another. Consistency – while admirable generally, is a third.

In fact, there are plenty of scientific gems in TA that do stack up when inspected.

Take the humble moving average for example. It describes an average price over a preceding period.

It is entirely reasonable to conjecture that around the value of a moving average, the market will divide somewhat between bulls and bears. Quite simply (enough for you, Mark), this is the price that the biggest clump of buyers from the selected time period are in - or out - of profit.

If the price is dropping towards their entry price, the soon-to-be-out-of-profit traders may want to pick up more or sell:

- to Support their entry price.

- to Average their entry cost down if it drops below.

- or sell to avoid a pending loss.

Conversely traders who are short and approaching profit may want to:

- load up on more as the trade looks like it’s going well.

- if the MA is breached, they will start selling to crystallise their profit.

- or buy more if they have conviction in the trade.

The size and consistency of each group and their view on future price will determine if a particular line indicating a meaning price acts like support (holders – in gross unit numbers – demonstrate more conviction than sellers)

So, you can see that moving averages can act like a magnet as price approaches and then as a reverse polarity magnet the further away prices move from it thereafter if the breach or rejection acts as a bellwether of market sentiment.

The relative strength of these groups around this average price is important because they are in tension with each other. Therefore, price often seems to stick around the more watched moving averages – the price here represents a mathematically relevant point at which buyers and sellers are more balanced, and a socially relevant one, where the period of the average is broadly considered important (say the 200 WMA on BTC).

And this is also why price tends to accelerate towards these averages, test them by trying to break through, break them when one side gets the upper hand and accelerate away once the vanquished close out their losing positions.

Most importantly markets are participated in by traders, investors, and bots. Each of these groups have an emotional component to their choices (yes, even the bots now they are sentient too), and price action is essentially a map of those collective emotions and sentiments. It seems sensible to try and interpret it.

This is not twaddle. This is how markets work. Even when ostriches stick their head in the sand, this is how they get a quiet moment to contemplate (Editor – clearly a reference to me …)

As an aside, moving VWAPs would make a lot more sense than simple moving averages. After all it’s the weight of the trade that counts, not the fringes of price.

…

Thanks for that Larry. I reply that the CCC is a broad church. One cannot be cancelled for having a point of view that is at odds with someone else, not even if that someone else is me.

So, I am very happy to let Larry have his say. But I do feel I need to make one small correction.

Levels like $20k, $50, $100k (when we do get there) are psychologically important but that is nothing to do with TA.

Oh, and one last point.

I am not sure I have a “virulent anti-TA view”. I think robust is more apt.