Saturday, November 10, 2012

The Stock Market: World's Largest Ouija board

The stock market is literally one gigantic Ouija Board, with participants steering a stock, index, commodity, etc, in a fairly predictable manner. Barring any type of news-based catalyst, stocks, indices and commodities will trade off any one of a number of market participant self-fulfilling prophecies. These self-fulfilling prophecies include but aren't limited to:

1. Fib levels
2. Moving averages
3. "resistance" and "support"
4. Consolidation
5. Break outs
6. Chart patterns
7. RSI Levels, etc

When all of the actors in the market are looking at the same levels and reacting to the same levels in the same fashion, predictable results occur. I used to think that the "technicals" were stupid to pay attention to, since they're so arbitrary in the grand scheme of things. However, when the majority are reacting to the same numbers, they become useful to trade, although still quite stupid.

When a catalyst comes along, typically new information, that new information will serve as the spark to propel the stock past a certain technical level. Since there's almost always some type of news affecting every stock every day, the gravity of the news is what needs to be considered when deciding if it's going to propel the stock beyond one of the self-fulfilling prophecies. Barring any other factors, I would argue the scales are tipped to 51% that the catalyst will be enough to propel the stock beyond that point. A lot of times when it breaks beyond that point, it serves as confirmation to those watching who now pile in to play the catalyst.

This is my own two-bit theory on how I trade. After observing the lunacy of the market for a while, it is exactly like a game of Ouija where things will drift somewhat predictably until that catalyst comes along to steer things in a more clear direction.

This post will be subject to edit down the road.

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