Mohan, I was not worried, and that's why I totally discount guys like Ralph Acompura. Equity markets are volatile compared to debt markets, and so there will always be ups and downs. The fear of the down leg in such a market is what allows the various oracles to have followings. For those of you who enjoy numbers, let me illustrate.
To demonstrate how fears can warp the minds of otherwise rational people I did a simple simulation exercise. Let's simulate a down cycle as a coin toss with 8 consecutive down days. Let's assume that 8 consecutive tails represents such a market. Now, the probability that any 8 consecutive coin flips will all be tails is pretty small -- 0.3906%. But let's say we're looking at a market spanning 250 days -- roughly one year. In that period we have 243 runs of 8 coin flips. The probability of not getting a run of 8 tails is therefore 1-.0039606, or 0.996094. But what is the probability of looking at 243 runs and not getting at least one of eight or more? Here is the anti-intuitive conclusion: the probability of getting at least 8 consecutive down days is 61.4%.! For those of you who are mathematically inclined, it is 1-.996094^243. Isn't probability theory fun?
This is the grist of TA. The fact that runs are not rare, but indeed probable, and the fact that this is an antiintuitive outcome is the fear that TA mongers work on.
Oh, and by the way, this seemingly directional movement of the market which is actually based on random movements is called a "random walk".
Cat Call #2
TTFN,
CTC |
