the hAnDbook of teChnICAl AnAlysIsinferring potential future price direction, any upside breakout of the larger de-
scending triangle may well precipitate a vigorous and rapid rally in prices due to
the unexpected nature of such a move. Traders must exercise caution especially
when shorting such a formation as prices can quickly explode to the upside,
caused by an avalanche of short covering.
Interpretational and Inferential Subjectivity
This element of subjectivity with respect to interpretation and inference is not
merely confined to applications in technical analysis. In fact, every form of analysis
involves a certain amount of subjectivity and arbitrariness when it comes to its in-
terpretation. For example, let us assume that the price of oil has risen significantly.
This event in itself can be interpreted in two different ways. One fundamentalist
may strongly believe that this rise in oil prices will impact the markets adversely as
it will raise the underlying cost of commodities, whereas another fundamentalist
may strongly believe that the rise in oil prices is a direct result of market demand,
a bullish scenario indicating a healthy and growing economy. In another example,
a technical analyst may strongly believe that an overbought oscillator reading
is a clear indication that the trend is strong with further continuation expected
in price, whereas another technical analyst may strongly believe that the over-
bought signal is a clear indication that the market may be already overextended
and therefore expects a reversal in trend. The beginner quickly realizes, after some
reflection, that for every bullish interpretation, there exists an equal and opposite
bearish interpretation. This is one of the main reasons why forecasting is regarded
as largely subjective.
Subjectivity and Selective perception
Human bias is another factor that adds to the degree of subjectivity when at-
tempting to interpret technical signals. Chartists will many times ignore signals
that conflict with their preconceived ideas of where the markets ought to be at
any one time. They only select oscillators and indicator signals that support their
analysis of the market. For example, a chartist uses three oscillators, the MACD,
relative strength index (RSI), and stochastics. The chartist has a bullish view of the
markets and believes that it is about to break to the upside. All of the oscillators
have bullish readings except for stochastics. The chartist ignores the stochastics
signal because it does not agree with his or her view of the markets. On a subse-
quent occasion, it is MACD that is not in agreement with the chartist’s view, and
only the signals from the other two oscillators are heeded. This is known as selec-
tive perception. See Figure 1.19.
Selective perception adds to the subjectivity of the forecast, as there is no fixed
point of reference or basis for making decisions based on evidence. Choosing only
signals that agree with one’s view will lead to biased and erroneous interpreta-
tions and unfounded forecasts. In fact, it is when there are discrepancies in the
signals that the chartist gains the most information from the markets, as it may be
an indication that there could well be some form of underlying weakness in the
markets.