The classic school of modern-day chart technicians goes under the name of Dow Theory because it was founded by the first editor of the Wall Street Journal, Charles H. Dow, who became the Dow of Dow-Jones. In its classical form, Dow Theory compares the movements if two indexes, the Dow Industrials and the Dow Transportations, which according to Jack Schannep and the editors of thedowtheory.com, yields a buy or sell signal about once a year. To catch more short-term trends, all kinds of charting devices have been invented.
I think the most popular technical tool of the modern trader is the Moving Average Convergence/Divergence indicator or MACD (pronounced Mac-D). At the Wall Street Journal for example the MACD is a default feature of every dynamic chart, reflecting market movements into a graph that helps gauge probable short-term trends in price.
During the head-and-shoulders scare of early July, technical analysis dominated market chatter. Investors have plenty of fundamental reasons to worry about another downturn, so technical signals can really spook the herd. The head-and-shoulders pattern was a pure technical signal that things could get very bad quickly. It spooked me. As it turned out, either there was no head-and-shoulders or the pattern was more of a signal that something big was about to happen up OR down.
The head-and-shoulders pattern, if it was one, actually signaled a breakout or sudden uptrend--which is not the first opportunity I have missed (in the market as in life) because of caution poorly timed.
This week the technical question becomes whether the breakout has established a new floor for a short-term trading range. The fundamental school seems cautiously optimistic that data will continue to come in "less bad." And many of the technical chart analysts--including the ones who spooked us before--seem to think we're going to be trading a new level up, at least for the near term. Technical signals don't take all the chaos out of the market, but they do help you to feel as if you are not gambling on absolute randomness.
The third great family of market theory, The Elliott Wave, could be placed under technical analysis as a subset of Dow Theory, but I'm going to place Elliott Wave Theory in its own camp, because it seems like another order of technical analysis altogether.
Once upon a time a fellow named Ralph Nelson Elliott became so ill that he did nothing but study stock charts. He came up with astonishing results. He found a wave with a complex construction in which advances were related systematically to declines. He theorized that each wave was a wave of waves in which the basic structure was repeated in fractal form. The closer you get to the shorter time frames the tinier the waves become.
The contemporary master of the Elliott Wave Theory is Robert Prechter, who does not offer much advice for free. If you want Prechter's analysis in detail you will have to pay for it. I think of him as the modern-day Pythagoras. As a market trader, I'm paying for his opinion and glad about it.
Well let me qualify that. To know Prechter's approach is to know a vision of the next decade that is not gladdening in outline. The long-term wave we seem to be on right now is the yin to that yang we were riding during the good times. If Elliott was correct about the underlying form of market waves, and if Prechter is correct in the application, then prices are really deep disclosures of a psychic life that buoys our collective consciousness. And no, dear reader, you are not reading a Pynchon novel just now.
The Elliott Wave school strikes me as Jungian in flavor, so it will be an acquired taste for most. Something about Jungian archetypes runs counter to mainstream thinking, so we shall soon see who teaches whom the greater lesson. For my part, the older I get the more sense Jung makes. And the Elliott Wave has a serious following among Real Investors.
Related to market theory is an emerging trend in "social investing." A visit to the KLD website will give you the essential orientation to social consciousness as it has been monetized by the investment classes. Also, a brand new ETF trading under the ticker symbol JVS brings a new style of valuation to the American investor by way of principles mandated by Sharia Law. I have written a little more about these items under a project called abetterorder.com. I own some JVS.
Even with only a few hundred bucks in play these are the things you begin to learn as if your fortune depended upon it. The market is a game--and you want to win. Which brings us back to something that I promised to discuss--the perspective of the investing class. This is a class of folks that for the most part have saved money that they are trying to grow and protect. They appear to be very smart and decent people, even downright likeable. And they have some very practical experience in how the market game works and how to win it. But I used to have a neighbor named Paul who worked all his life for the city parks department.
"Never was a rich man who didn't get his money off a poor man's back," is what Paul would say. Which is another way of claiming that all Real Value comes from labor. If we extend Paul's intuition to the investment classes as such we might say that all great wealth is already a kind of redistribution.
On the one hand I wonder if Paul could have done better in the wealth department if he had applied his eighth-grade education and not assumed that investment potential belonged to other people. No doubt there are a billion people asking that question right about now. Better choices are always possible. Nobody can say they weren't warned. So I can see how value belongs not only to those who produce it but also to those who treat it best.
Therefore, I can understand why so many smart investors take a hard line when it comes to the kind of respect we should pay for value. I can see why they have a passion for gold as a standard. A devotion to standards of valuation has allowed many of them to see clearly how our loose regards would steer us into the ditch we're in. When you start watching your money closely in a trading market, these perspectives accrue practical value.
On the other hand, market trends are thoroughly social if not absolute manifestations of collective (un)consciousness. The problems of market cycles have dimensions that exceed the sum of individuals. As my neighbor Paul implied, strictly speaking there is no such thing as individual wealth. All wealth in some sense is held in trust. Likewise, individuals don't create market cycles, it takes a market to go boom and bust.
