Although I started out as a chart technician, I haven’t been a big fan of charting ever since I learned of other more important real drivers of the markets.
I believe that the biggest flaw in charting has been in the assumption of the constancy of market psychology that which disregards the incentives that drives the intertemporal psychology operating across diverse environments and dissimilar conditions, giving undue weight to past performance in the knowledge and understanding that past performance does not guarantee future results, and that which assumes away the probabilistic success of the heuristic of pattern seeking backed by mathematical formalism as prediction tools.
Nonetheless I still observe charts because a large segment of market participants use them and because of such large following, charts patterns can be occasionally become a self-fulfilling mechanism.
Besides chart interpretation are subject to the interpreter’s bias. People tend to see what they like to see—a confirmation bias.
As trader and author Alexander Elder warns[1],
Groups suck us in and cloud our judgment. The problem for most analysts is that they get caught in the mentality of the groups they analyze.The longer a rally continues, the more technicians get caught up in bullish sentiment, ignore danger signs and miss the reversal. The longer the decline goes on, the more technicians get caught up in bearish gloom and ignore bullish signs.
I earlier pointed out ASEAN markets appear to showing signs of increasing strains.
There have been two opposing head and shoulder patterns operating on the Phisix.
The short term bullish reverse head and shoulder as shown by the green lines has been a common sight among bulls chartists.
However last week’s huge decline in the Phisix appears to have formed a conflicting but longer term bearish head and shoulders.
And what adds to the bearishness is that of the declining slope of the neckline, which according to stockcharts.com[2] “The slope of the neckline will affect the pattern's degree of bearishness—a downward slope is more bearish than an upward slope.”
And when there is a conflict between short term and long term patterns, according to chartist author Deron Wagner[3] “When chart patterns conflict with one another, the important thing to remember is that the longer time frame always holds more sway that the shorter one”
The Phisix pierced through the 50-day moving averages, but if selling pressures will be sustained then a death cross, where the 200 day moving average move above the 50 day average, may add to the bearish outlook.
In and of itself I wouldn’t give so much merit to these, since I understand that Mssrs. Bernanke, Kuroda, Draghi, Carney and Tetangco can reinforce or falsify patterns.
What interests me today, is that the Phisix and Thailand’s SETI has nearly identical patterns, albeit the SETI seems as in a far more advanced state of infirmity.
The death cross seeks almost imminent.
Indonesia’s JCI can be seen in the same light, a conflict between short term double bottom against the longer descending triangle.
Malaysia’s KLCI seems as the most resilient among the three. But last week the ringgit was beaten down and this has been reflected on the decline of the KLCI.
It will be interesting to see if Malaysia will be able to decouple from her contemporaries or if she can lead the region to breakaway from the bearish backdrops.
Bottom line: Even if stock markets of developed economies appear to have entered a euphoric mood, the failure of ASEAN stocks to join bandwagon looks like a warning signal.
Trade cautiously.
[1] Alexander Elder Trading for a Living p 64
[2] Stockcharts.com Head and Shoulders Top (Reversal)
[3] Deron Wagner Trading ETFs: Gaining an Edge with Technical Analysis
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