Friday, 17 April 2009

The NEMESIS of Technical analysts!

Technical analysts in the stock markets and other financial markets rely on past data and charts made out of past data. They find patterns in these charts and follow them to such an extent that they believe that these patterns are gospel truth. Actually these charts are a reflection of the "mass psychology" or the collective mind of the players in the stock markets. There is a proliferation of technical analysts in the markets these days because market men have started to increasingly believe that with the advent of the Internet and the real time television media there is no incentive for any kind of fundamental analysis.
Fundamental analysis is akin to finding value hidden from the average investor. A Fundamental also depends on the past financial data and past experiences with the management of the companies, apart from his / her prognosis about the state of the economy, sector, industry and the company.
Technical analysts tend to forecast the behaviour of the markets depending upon the patterns that these charts make and the levels of the prices. Most technical analysts read the same books and follow the same theories therefore they tend to conclude the same things. The only force that acts against them is the regulatory force like a government or the central bank which can change the course of the markets by setting a new agenda or by directing the economy in a new direction. When ever a market falls to a large extent and there is general despair in the markets, usually the government or one of its arms comes out to support the market. This team that starts working against a trend to stem out the despair is called "The Plunge Protection Team". All the technical analysts who are gloom and doom specialists are wary of this plunge protection team. Some times this team over reacts to the situations and gets into high gear at the fall of a hat. sometimes it takes its own time, not recognising impending dangers and acts too late and in too small measures (that's what happened last year and that's why the markets became bear friendly).
The moral of the story is that, the best type of analysis suited for the markets is something called techno-fundamental analysis which also keeps its eyes open for regulatory changes, world wide happenings and market movements. because in "mass psychology" the government is not part of the "mass". So, i think we can say that the regulator is the nemesis of the technical analyst.
Now for my take on the markets: NIFTY is expected to go forward in its bullish journey up to 3600 and then take a pause for the election results. The results of the General elections will then set the agenda further until then its wait and watch. A short straddle on the NIFTY at 3500 would be ideal for the time being up to April expiry.