Todd:
Excellent post with nice pictures! <g>
You said:
>> If no one could look at a chart of a stock, and if no one could calculate moving averages, stocks wouldn't bounce off of moving averages. But because people expect certain stocks to find support at the moving averages, they buy at the moving averages. That's a self-fulfilling act. <<
Actually I believe the reverse is true. Before computers were integrated into the analysis of the markets, stocks still traded without technical analysis (well, if there was any TA done by graphing by hand, it was very crude and did not include the use of MAs).
Concerning MAs not acting as support or resistance if we all could not view them graphically though is contrary to how MAs were even formulated. Analysts sifted through old market data once the computer was being used in the analysis of the market and found that certain MAs in the market's history actually seemed to provide support and resistance for stocks at different times. The most important part of a MA, however, is not whether a stock bounces off it or not but whether the slope is positive or negative.
A Little History
Wall Street Old Timers claim that moving averages were brought to the financial markets by antiaircraft gunners. They used moving averages to site guns on enemy planes during World War 2 and applied this method to prices. The two early experts on Moving Averages were Richard Donchian and J. M. Hurst. Hurst was an engineer who applied moving averages to stocks in his now classic book, The Profit of Stock Transaction Timing.
The strength of a trend can be measured by its relative position to its MAs. In the past, stocks had for some reason actually found support and resistance at these levels. Why? Probably the same reason Fibonacci's numbers pop up in the stock market even though they've been around for hundreds of years.
The two hypothesis as to why TA works is that it's all a self-fulfilling prophecy or that it actually gauges market mass psychology. Is it possible that it began as one and became the other? Or perhaps its a mix?
Conservatively Yours,
Raymond J. Norris |
