Uncovering the Essence of Market Movement
In This Chapter
Looking at a new model of supply and demand
Figuring out the crowd
Reverting to the mean
Handling crowd extremes
Studying the big picture
Technical analysis focuses on the price of a security rather than its fundamentals. The collective behavior of buyers and sellers, also known as “the crowd” or “the market,” sets the prices. The market may be rational or irrational, but the market is always “right” in the sense that it sets the price of a security. You and I, as minor members of the market, don’t get to set the price, no matter how intelligent our analyses and piercing our judgments.
In this chapter, I suggest one way of looking at the supply-and-demand dynamics of crowd behavior that’s consistent with the technical approach — the auction model of supply and demand. Next, an outcome of crowd behavior is the tendency of prices to cluster around the average, even when the average is trending. It’s useful to identify clustering, in part to know when to heed the prices that stray from the cluster. Also, a large group of technical traders think that crowd behavior fits a particular model based on a sequence of numbers called the Fibonacci sequence. At the end of the chapter, I address whether this is a useful way to work with technical concepts.
The eBay Model of Supply and Demand