A theme I notice when dealing with normies is that one should not be penalized for their limited capacity to understand. Yes, there are methods to communicate and make things as simple as possible, but even so, the very idea of a new concept is often seen as a boogeyman.
Therefore, in their limited understanding, they gravitate towards something that is manageable within their mental capacity.
I came across a technician’s post that might pass off as good TA…
Following a downside reversal like last Thursday, the S&P 500 typically experiences a modest short-term correction. Over the ensuing three weeks, the world's most benchmarked index displayed a negative return at some point in 12 out of 14 instances.
The technician shows what they think might be the causes for correction, which I refute in the points below, because most of the causes for correction are the same variables for markets being at an all-time high.
There is a reference to concepts like market breadth with Advance-Decline ratios, which measure the number of advancing stocks versus declining stocks. This has been one of the concerns people have been discussing for a long time while complaining about the dominance of the “Magnificent 7,” which makes up over 40% of the market weight in the S&P 500. A 40% weight can lift the market irrespective of market A/D.
The use of range expansions of highs versus lows in the market does not refer to consecutive higher closes (see the next point). When range expansions are above 1 in this indicator, the signal yields mixed results. Therefore, the analysis states 1.61. What is the basis for 1.61? What are the results at 1.5 or 1.62? Why only 1.61? This is an example of curve fitting.
3. The indicator shows that closes leading to higher highs are also mixed in their effectiveness. What stands out is that closes in the top 80% of the range, regardless of whether there is range expansion or contraction throughout the time series, dominate the signal.
Therefore, if you are looking for a cause, as in the case of some fundamentals, it is often not the cause of price action. In fact, the drivers for why the market is at its current levels are often different.
Is it important to know the short-term causes?
Not necessarily.
It’s more important to understand the long-term causes.
One certainty of cause for both long and short term is the market auction.
At the start of this note, I mentioned the unintended consequences of ignorance. If an astute capital allocator reads this technical analysis example and acts upon it, believing they understand the root cause of why the market is behaving in its current manner, that could lead to a lot of losses based on fallacies.
These fallacies are based on the limitations of one’s minds eye.
I’m humble enough to look at markets based on probabilities rather than absolute certainties of causality.
