Hi rrufff,
FWIW, my view is this:
The market (i.e., trading participants, actual or potential) take in all available relevant information and process it in real time. "Information" may be real, imagined, hoped for, or feared, and is constantly changing. Most of the changes are relatively slow and orderly and predictable. Most of the information alters market judgment to a rather limited degree as it comes in, because it must be digested within the context of the universe of all other information, and because there is a lot of other bits of information coming in at more or less the same time. So no one bit has any inordinately high value.
Then, the readout of this information processing is the decision to buy or the decision to sell (the real world equivalents of greed and fear, the two emotional drivers of all markets).
Since the information processing is ongoing and constantly updated, so to the readout (buying and selling pressure). But because the incoming information is relatively slow and orderly and constant, the summation (readout; buying and selling pressure) is usually slow moving and tends to be describable in terms of some mathematical function. It is this latter feature that TA measures. So long as these conditions hold, then TA tends to work very well. And, the readout is directly translated into price movement (assuming the decision to buy or sell is actually followed by action to do that, which is normally the case).
Occasionally, the market must process a big chunk of new information that causes a major change in readout. That will reset the TA, and can make it wildly inaccurate. Again, in my view, the predictive power of TA depends upon the orderly output from information processing, which in turn depends upon orderly input. This also presumes that no one piece of information strongly influences things, so the ideal is when you have constant input from many sources, none of which are very important. In that case, you tend to have very orderly price and volume movement.
You can think of this in terms of an analogy. In Sri Lanka prior to the earthquake, they had relatively orderly input from waves and tides. Under these conditions, the people there were able to process this information and make reasonably accurate predictions about the best times to go swimming or fishing or something, and how to live close to the sea without being subjected to floods from wind, waves, and tides. But after the earthquake, everything had to be "reset" suddenly because of the sudden change in input from the waves and tides. This was not predictable from prior behavior of waves and tides, and because Sri Lanka had not processed any of this information, and had not foreseen this possibility (which would have partially priced in the event), and because it was a big chunk of highly significant information, it had an overwhelming and devastating effect.
So too, news is one major source of input that can suddenly and strongly influence the readout (buying pressure and selling pressure). And as Reid has pointed out on many occasions, news trumps TA any day of the week. The more important the news, the greater the tendency of that news to negate the predictive power of TA.
Now, Reid doesn't really come right out and say this in so many words, but I think he would agree just the same: the reason why TA works even though fundamental analyses are ignored is because the input from fundamental analyses tends to be slow and orderly, and no one piece of fundamental input tends to have a big effect under normal conditions. Thus, these conditions do not violate (or measurably affect) the basis for TA, which is that information input is orderly and follows some function, and so too then the readout will tend to be orderly and follow some function. That function is directly reflected in the technical derivatives of price and volume (also sentiment, but that is another issue, though related). This means that there is nothing special about fundamental analyses---this is just another source of information input. The source of the information input has no effect on TA. TA doesn't care whether that information is numeric data on a balance sheet or sheer hallucination and rumor that is totally unrealistic. Only the orderliness and incremental effect on readout has an effect, and even there, a certain amout of fluctuation is acceptable, even desirable.
In the case of DROOY (which I don't follow), I think it important to realize there is nothing special about this stock. The description of market behavior above applies here, just as it does to all markets. The thing that seems different is the looming possibility of the currency revaluation. The currency difference itself is not a problem. You implied this yourself when you say "I would imagine that a US$ - Rand chart may be quite similar to the charts you posted on DROOY, or inverse, depending on which variable is your Y axis".
So, the currency fluctuations are being processed in real time, but are relatively orderly and slow, so the effects on buying/selling pressure (DROOY stock price) are relatively orderly and slow also.
Now, a weakening of the Rand would constitute something of a tsunami and would reset everything. But the difference here is that the market is processing not just the tsunami (should it happen), but the perception and judgement that it will happen as well. This is the sort of thing that I was referring to when I said that the market processes all available information---real or imagined, hoped for, or feared. Information does not have to have any basis in fact at all.
But this perception and judgement of the market regarding the Rand may not be bad at all. If, for example, the market begins to believe more and more strongly that a weakening of the Rand is likely, this will get processed and priced in on the fly. Then, if the market is correct, the impact of the event will be significantly blunted because the market judgments that were not based on reality (yet) had already priced in the event to one degree or another. At the limit, if the market fully prices in the event, then when it occurs, it will cause no flooding of low lying areas at all, just merely a ripple at your toes.
Hope this helps, but this is only my view.
T |
