Forum Archive Index - August 2001

[Phaedrus <Phaedrus@techemail.com>]

Ben,
     In theory it is possible that technical indicators could sometimes give 
signals that, given enough of a following, could move the market, and thus 
become self-fulfilling. In practice the situation is not that clear-cut. As 
with any other group, technical analysts cover the entire spectrum ranging from 
long-term investors right through to intraday traders. This large and diverse 
group of people are all using different indicators in different ways and in 
different combinations. I just happened to use a trendline in this case, but 
could have used any of 25 other common trend indicators. Similarly, though I 
used a Stochastic oscillator, there are more than 20 other commonly used 
momentum oscillators - all giving slightly different signals at different times 
and with different interpretative rules. Add to that the fact that individuals 
can (and will) choose different time periods and/or trigger levels for each 
indicator, and it is clear that there will never be an exactly coincident mass 
action by a majority of TA followers, no matter what.    
   It is important to realise that technically derived signals are not plucked 
from thin air. All they are doing is drawing attention to, or quantifying, 
price movement that has already occured. In the case of most Sell signals, for 
example, a drop in price has already occured - all the signal does is blow the 
whistle. Anyone else selling now (regardless of their methodology) will 
contribute to this downward trend and help "confirm" the signal. The smaller 
and less liquid the market, the more it will be pushed around by any concerted 
action, regardless of its source. Add to all this the fact that technical 
analysis does not work well on lightly traded illiquid stocks, and you will see 
that, while I think you could be right, it is probably not a practical 
consideration.
     <<<<< Would a sell signal be if the share price dropped below $3.30 ?  
Mat. >>>>> That would depend on your trading horizon. A very short-term trader 
would be following a fast oscillator such as the Stochastic, and would have 
sold at the Close today at $3.47, as the oscillator crossed the red signal 
line. A slightly less active trader would be looking to sell at a pivot point 
reversal - currently this would be a Close below todays low of $3.42. A 
medium-term trend follower would sell if (when) the price closes below the blue 
trendline. This stock is in an uptrend - as I pointed out there are over 20 
commonly used trend indicators. The idea is to choose one that suits your 
trading style and preferred level of activity.
       Phaedrus.

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