E, don't have much to say one way or the other about your chart, but, if you open up your copy of MST, you'll see fairly extensive discussion of what Farley calls "price channels," whose existence and persistence, he at one point claims, are enough by themselves to disprove academic theories of random price movements.
In conjunction with LTK's discussion of his study of the VIX, I think your descriptions point toward something that those of who study and practice technical analysis do far too little of, in my opinion: Addressing the underlying reasons why a given pattern or indicator "should" work, and why it is more or less likely to do so under present conditions.
The falling wedge pattern observed by many in the major tech indices offers a good case study. As with other such patterns, there are usually three general areas of argumentation offered as to why it should work: 1) notions, often joined to larger theories about the "natural" evolution of markets, about how the pattern reflects greater or lesser motivation on the part of buyers or sellers; 2) the belief that the development of the pattern itself can, at least at some critical margin with all other things being equal or random, influence further price behavior due to the responses of technical traders; 3) suggestions that there's no way to know or pin down the precise "why," but that the pattern/indicator has functioned in such and such a way in the past, so it's likely to do so again this time.
The falling wedge is generally thought, I believe, to reflect a gradual decrease in "overhead supply" under distribution against a gradual (relative) firming up of demand, thus resulting in a slowing rate of price decline. Once the supply has been distributed, the theory goes, there's little left to resist residual demand, and the lower price awakens new interest on the part of other buyers, resulting in a price rise. Failures in the pattern might come about if, say, some relatively large amount of reserve supply exists that holders have thusfar been unwilling to part with, hoping perhaps that a later rise will lead to enhanced profits or at least reduce their losses. A new acceleration in the decline (or a sudden failure in demand) might induce these holders to panic and decide to sell "at any price." It seems to me that the current market is somewhat more vulnerable to the latter scenario than it would be in "normal" or bull market conditions. For this and other reasons, I believe that the case for awaiting an actual breakout rather than going long aggressively ahead of it is stronger even than it would have been, say, a couple years ago.
Arguments for the importance and influence of trendlines and also of "ghost-trendlines" of the type you describe are somewhat more complex. A trendline is thought to reflect and reveal the existence of a more or less systematic "campaign" of distribution or accumulation on the part of a mass of investors, and the steepness of the line is thought to reveal, over time, the imbalances in motivation (and financial strength) between buyers and sellers. In addition, because the trendline is relatively easy to draw, and because the existence or endangerment of the apparent trend can be fairly obvious even to those who do not bother to draw the line, its continuation or failure will be likewise apparent to market participants, with enough of them aware of any rupture or impending rupture for the event to induce action, with the marginal influence of this action turning on and initially accelerating in proximity to the "actual" point of the rupture (or successful test).
By this reasoning the ghost-trendline would have less significance to large numbers of market participants than a dominant trendline (or dominant underlying trend), but might still retain some marginal influence, and would remain of interest to whatever extent it reflected the motivation and typical behavior of a significant buyer or seller (or groupings of buyers and sellers). Resorting to theories that are too complicated for me to go into here, others argue that trendlines (and trends), parallel and otherwise, appear as a result of the interaction of underlying forces that operate and interact on different time-frames and within unique parameters, and that price channels in particular appear "naturally" as a result. To make a long and complicated story short, whenever the influence of the major trend is for some reason in abeyance (not under some direct test), such minor or underlying trends would be revealed.
I hope that helps, and I hope that you'll forgive me for over-simplifying and if I've simply re-stated things that you already know. I'll also note that I'm well aware that many observers consider this kind of reasoning to be complete balderdash. It helps me, anyway, I think, to go through the exercise of stating a given technical trading rationale, though, as ever, I remain open to enlightenment by those whose sophistication, experience, and insight exceed mine. |
