Introduction to the Art and Science of Technical Analysis
Figure 1.32 shows the market overreacting to new information. We see the
insiders accumulating shares prior to the release of the new information. The
public joins in after the information is published. Public participation begins to
increase as more participants join in the now obvious rally in prices. This contrib-
utes to the herding behavior that finally causes the market to overreact to the new
information. This is exactly what the insiders are hoping for, in order to extract
the greatest amount of profit. Eventually a top is formed as the market runs out of
buyers and/or money to invest. The activity subsides only to repeat again.price versus value
One interesting question that many novices ask is whether the market is discount-
ing price or value. In fact, a more fundamental question to ask would be whether
price represents value. If it does, then how do we explain a stock valued at $10 ris-
ing to a price of $30 in the absence of any significant changes in its fundamentals?
In reality, market action is merely the collective expectations of all its
participants. What we are really trading is expectation. It has not very much to do
with absolute intrinsic value, but rather its expected value. In short, current price
is the result of expectations about future price and value.Market behavior repeats Itself
The second assumption or premise of technical analysis is that market behavior
has a tendency to repeat itself. This means that past price and chart patterns will
provide a reasonable basis for forecasting potential future behavior. The underly-
ing explanation for the repeatability of price and market behavior lies in the fact
that market behavior is driven by human psychology, which seldom changes over
time. The uses of past patterns to predict futures moves are grounded in the reli-
ability and consistency of human behavior.fIgure 1.32 Markets Overreacting to New Information.