Stock Market 010: Charting the Future – Business Mirror

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From earliest recorded history, humans discovered that there were cycles and patterns that occurred naturally and that understanding these were beneficial. Melting snow gave way to warmer temperatures. Plants would begin to grow faster, leading to a period of hotter days.

Two things were obvious. We could not change the cycle and we had to understand and follow these patterns.

A child in winter might think the world was all snow and ice. In tropical climates, every child knows that there is a rainy and dry season. But an adult that lived through the cycle could say the rain would soon end. The child might think that the adult could see the future.

Read these two quotations. “It’s pure pseudo-science. It has zero scientific validity. It’s something that was pulled out of thin air and promoted by ‘gurus’ in an attempt to give it credibility.” “It’s not science. No one has shown that it can be used to predict the future.” Which one refers to stock market technical analysis (TA) and which to modern astrology? To further confuse you, astrology has its gurus also.

We have this natural inclination to look for “scientific” formulas to solve our problems and give answers from making babies to raising the children we made. Every painter knows that mixing the pigment colors blue and yellow creates green. But what is the formula for painting the woman’s sad eyes in Pablo Picasso’s Femme aux Bras Croisés?

Almost every large city in the world has a circumferential or ring road that circles the city or metropolis. Washington, D.C., has its Capital Beltway and in South Africa, it is the Johannesburg Ring Road.

In Metro Manila Epifanio de los Santos Avenue does not make a complete circle, the M25 or London Orbital Motorway is a 188-kilometer motorway that goes around Greater London, England. The Kölner Ringe in Cologne, Germany, is 6 kilometers long.

If you started driving on either of those ring roads, not knowing any better and not being the brightest light bulb on the Christmas tree, you might think that you were driving on an eternal highway. However, one look at a map of the city would reveal the highway pattern and that you were driving in a circle.

Contrary to most people’s perception, TA is not a scientific formula. It is a map of price movement. There are at least 100 different “indicators” or formulas to interpret price movement to predict the future, and, in my opinion, they are mostly nonsense.

Look at a map of Edsa. If you know how to read a map, you can “predict” that there will be heavy traffic coming up to Ayala Boulevard. There is a huge shopping center at that location. It is an access point from the equally huge Bonifacio Global City, and the road narrows going through a tunnel.

TA gives you a map of price levels at which sellers were no longer willing to sell and at which buyers were no longer willing to buy. Those are called support and resistance. No magic formula; just a map.

Under certain conditions and with perhaps a crack in the space-time continuum, you could drive through Edsa at Ayala with your eyes closed at 180 kph. Likewise, sometimes sellers and buyers completely ignore support and resistance.

When driving to an unfamiliar place, a map is a valuable tool. TA can serve the same function in the stock market and I like both tools and am excellent at using them. But you have to know when to throw the map out the window and when to disregard what the charts are saying.

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 E-mail me at [email protected] Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.

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