To Chartists, It’s All There in the Double Bottoms, Wedges and Whipsaws
What do double bottoms, necklines, golden triangles, whipsaws and wedges have in common?
A lot, if you happen to be a stock or currency dealer trying to figure out which way the markets are going to move next.
Many dealers make charts of the progress of the market they watch and try to figure out from the shape of the peaks and troughs what will happen next.
To the uninitiated, the notion that charts can divine the future might seem absurd. But chartists see them as a reliable and sometimes highly profitable way to forecast trends.
“To me, charting is an art,” said Maurice Lam, general manager at Security Pacific National Bank’s Tokyo branch. “Anybody can be a chartist in five minutes. All you need is a ruler, a pencil and a square piece of paper.”
Years of Practice
The trick, he added, is to interpret accurately the chart patterns and figure out which way the line will go next. And that can take years of practice.
“Using charts, you can enhance your batting average above 50%, but you shouldn’t rely solely on charts,” Lam said.
The “double bottom” is one of the patterns chartists look for most often--the price falls and rebounds, then falls to the same level and rebounds again. Chartists then conclude that the price has struck bottom and is likely to rise.
Then again, maybe there will be a “triple bottom,” and where one chartist sees a “double bottom,” another may see a “head and shoulders,” an extremely bullish sign.
“I tried my best to get one of my clients to see an inverted head and shoulders in the price pattern of a stock, but they just couldn’t see it,” said one Tokyo stock analyst.
“Admittedly, the second shoulder was not very clear, the head was kind of ragged,” he added.
The stock subsequently rose 15%.
Chartists, less numerous in Tokyo than in other major trading centers like New York and London, are sometimes the butt of jokes from skeptics.
‘I Don’t Tell My Friends’
“I talk only to people who understand, (and) I don’t tell my friends who aren’t in the banking business that I’m using the stuff,” said Masato Nakamura, a currency analyst at the Sumitomo Bank.
Most nonbanking types and some traders who dip in and out of the currency market for quick profits would rather know the political and economic reasons why the dollar is likely to fall or rise.
But some orthodox chartists maintain that all you need to calculate which way a market will go is to look at the charts without any reference to the news of the day.
“Head and shoulders, double bottoms, wedges--people not versed in the market look at you like you’re crazy and reading tea leaves when you mention these things,” said a share analyst.
And no wonder. Some technical theories long accepted in certain financial circles can stretch the limits of plausibility.
Take the Elliot Wave Principle, for example.
The Snail Pattern
Developed to forecast stock prices in the 1930s, this theory holds that prices unfold in regular cycles of eight “waves"--five waves in the direction of the main trend and three corrective waves the other way.
These waves can span minutes, hours, weeks, months, years or even decades.
Moreover, the theory says, prices in financial markets are governed by the same mathematical principles inherent in the growth patterns of snail shells, galaxies and bacteria.
“Social scientists find it outrageous, the idea that markets move to underlying rhythms,” said one share analyst.
Then there are the mysterious Fibonacci numbers.
This series of numbers was named after Venetian mathematician Leonardo Fibonacci, who lived in the 12th Century. He observed the that the sequence 1,2,3,5,8,13,21,34,55,89,144 etc. contained remarkable properties which are believed to be present in art and nature.
For instance, when each number in the Fibonacci series is divided by the next, the result is a sequence of numbers that approach 0.618, the same ratio of the base to the height of many pyramids of ancient Egypt.
Into the Twilight Zone
Many chartists still use Fibonacci ratios to project stock and currency price trends.
Stepping a little further into the twilight zone are those who dabble in “astro-economics,” which is based on the idea that the moon and positions of the planets can affect markets.
“The evidence is convincing that there is a statistical likelihood there will be an upturn in commodity markets on new moons and full moons,” said one analyst. But he added: “I don’t use it (astro-economics) because I don’t understand it.”