Introduction to the Art and Science of Technical Analysis
large block purchase of shares in the market before it occurs. The detractors are in
fact perfectly correct in their contention, except for the fact that the markets do not
actually discount unknown information or unexpected events. The market can only
react to what is known or expected, which includes insider activity. It does not react
to what is unknown or unexpected. Although insider information is nonpublic, it
is still considered to be known information, since the action of insider buying and
selling impacts market action and as such represents information in the markets.
It may be more realistic to think of the market as in a continuous process of
assimilating and adjusting to new market information, rather than an unrealistic
full‐blown discounting of all information instantaneously.What are the Markets really Discounting?
It is not merely news, economic releases, or corporate data that the markets are
discounting. The assumption is that it discounts everything. This includes:■ (^) Information about actual events
■ (^) Expectation about actual events
■ (^) Information about expected events
■ (^) Expectation about expected events
■ (^) Expectation about the possibility of unexpected events
Some also argue that there are many other forms of discounting like buying
the rumor and selling on the fact. They are curious as to what the expectation
should be in such a case. Should the expectation be that prices will appreciate
once the good news is released or should the expectation be that prices will fall
once the good news is public knowledge (since everyone is in fact selling on good
news)? How would we know if the market is discounting the:
■ (^) Rumor itself
■ (^) Expectations about the rumor
■ (^) Expected good or bad news
■ (^) Actual news
In reality, the market discounts all of the above. Regardless of what the
markets are discounting, be it quantifiable or otherwise, the end result is that
price and markets action will ultimately reflect the collective expectation of all
participants.
Market Discounting versus eMh
Efficient Market Hypothesis (EMH) states that for a market to efficiently discount
and reflect all information perfectly, all of its participants must act on all information
in the same rational manner instantaneously. Does this definition of EMH also ap-
ply the basic assumption in technical analysis that the market discounts everything?
Detractors of EMH contend that the act of discounting everything is not real-
istic or is largely impossible. They argue that the problem lies in the action taken