Why did markets fluctuate? The majority of analysts, investors, and even financial journalists will search for news first. Maybe the employment statistics were released, a company said it was being purchased, or a central banker delivered a sombre speech.
But there is a small, devoted sect of "chartists" or "technical analysts" who think they can predict how stocks, bonds, and currencies will move by creating and analysing charts.
They employ numerous, different, and oddly termed techniques. When the price of an asset's short-term moving average drops below its long-term moving average, this is known as a "death cross.
The concept behind "Fibonacci retracement levels" is that an asset with growing value will eventually decrease before rising once more. Such reversals are meant to come to an end at Fibonacci number levels, such as a 61.8% decline.
The "ichimoku cloud," which Japanese traders like, is created by darkening the region between two averages of high and low prices during the course of the previous week, month, or two months.
Because of how the s&p 500, the most important indicator of American equities, has fluctuated recently, these tactics, while being obviously insane, have gained attention. On June 17th, the index hit a low of 3,637 before starting to rise.
Many common investors utilise trend-following in one form or another. Successful quantitative funds like aqr Capital Management employ factor investing, for which Eugene Fama and Kenneth French were awarded the Nobel Prize.
maller organisations generate greater returns than larger ones due to characteristics like "size" and "quality," which are broken down into component elements (low-debt, stable businesses earn better returns than riskier ones).
Despite this, it is understandable why chartists are so preoccupied with levels and patterns. Even if there is no discernible difference between a euro's value at $1.000 and $0.9999, these "large figures" in the foreign currency market take on significance.
Investors look to see where other investors are placing their orders before placing their own. In order to close a transaction that goes against them at a reasonable level, they can use it to assist them set a stop-loss order.
What technical analysis tells you about market circumstances may be its true worth. When the economy is strong, profits are great, and stocks are rising steadily, no one pays attention to the attractive charts that chartists produce.
Some people may not understand what is actually going on if they attribute the end of the summer rally to a technological tripwire.
Perhaps Buttonwood could create her own technical signal, as it becomes increasingly obvious that nobody knows why the markets are moving the more often chartist analysis arrives in her mailbox.