Tuesday, June 25, 2013

Technical Tuesdays: One Thing Chartists Are Definitely Salivating Over

Anyone who knows my work in the technical analysis/market intel area is well aware of the fact that I am not a big fan of pattern recognition*. I have never been able to produce a reasonably (let alone highly) predictive model of future price action based on price patterns. For those who can do this, I have two words: "God bless".

There are, however, many who do believe in such stuff and will act on them and, thereby, influence the price of an individual issue and/or the market overall. Therefore, let's look at something that I am certain just about every chartist worth his/her salt is salivating over: a head and shoulders top in the making in the emerging markets area.

As the accompanying chart** makes quite clear, just such a pattern is on the verge of occurring with roughly a $35 number being the neckline. Now, according to the principles of this pattern, the measured move is from the top of the head to the neckline, which is roughly 15 points. And 15 more points to the downside would drop this index right into the zone of its previous bottom area made in the winter of 2008/09, which is in the low 20s. (Funny how these things seem to work out.)

Now, for those who mesh the fundamental with the technical, a plunge to the low 20s would bring with it a plunge in the P/E ratio to just under 6 - assuming, of course, earnings remain right around where they currently are and not, as logic would dictate, accompany the market price plunge with an earnings plunge.

Investment Strategy Implications

Just because one cannot or does not employ a particular analytical discipline is no reason to ignore the reality that others will act based on that analytical discipline. But it must be noted that when it comes to pattern recognition there is one essential dictum: never anticipate the move. Or to rephrase Orson Welles from a wine commercial of decades away: "We will sell no asset before its time". Therefore, the advisable course of action is to set aside the bib and restrain the saliva glands as the pattern you see is one that has not completed itself. And that means anticipatory action is taken at one's one risk (or is it wish?).

*The ability to identify future price action based on past chart formations such as head and shoulders tops and bottoms, wedges, flags, pennants, etc.
**click image to enlarge.


Technical Tuesdays is a product of Blue Marble Research Advisory and illustrates selected elements of market intelligence analysis. Market intelligence analysis - along with fundamental and thematic analyses - form the three-legged stool of the analytical approach employed by Blue Marble Research Advisory.

To learn more about Blue Marble Research Advisory services and its integrated approach to investment strategy and decision-making, click here.

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