Cinderella Analysis?

BarroMetrics Views: Cinderella Analysis?

On the weekend, I also received the post from Andrew that I have reproduced in comment. I think Andrew raises points that would be of interest to all.

I am not sure what he means by ‘Cinderella Analysis’, so rather than go down a false trail, perhaps it would be best if I approach Andrew’s observations by explaining how I approach Method in my trading.

In my trading, I use the Wyckoff–Steidlmayer approach to Method i.e. we start with first principles, and then proceed to determine patterns that are in accord with the principles. For example, Pete Steidlmayer says that the purpose of markets is to facilitate trade. In other words, markets will go to prices to attract the most activity. From this principle, a number of patterns emerge e.g. the 80% Rule.

Analogue charts, such as the one I have been using until recently, show us situations where markets of previous years rhyme with the current price action. It’s not a question of blindly following what happened in the past; it’s a question of comparing prior price action and utilising the rhyming until such time as the rhyming ceases.

The 1966 to 1982 view has served me in good stead – it helped me identify the tops in 2000 and 2007, and the bottoms in 2002 and 2009. I first adopted the “long or out” strategy in September 2011 when I realized the extent to which QE was distorting the stock market. The strategy called for buying any dip simply because of QE.

I have not traded the S&P for 18 months because I am uncomfortable with being a buyer on the whim of the Federal Reserve. On the other hand, given my view of being either “long or out”, I have not stood in the face of the advance by attempting to short the market.

Turning to the other observation, technical analysis from me is not a crystal ball. The power of technical analysis comes from a visual interpretation of the psychology of the market. However, technical analysis assumes a relatively free and transparent market. This is not the case at the moment. And, while technical analysis can create scenarios based on the actions of the market as a whole, I have less confidence in its ability to ‘read’ the minds of the 12 Fed Governors.

For this reason, I prefer to stand aside until either a black swan event occurs that demolishes the false belief that the Federal Reserve can indefinitely hold of the market; or the Fed begins to put an end to QE.

Thanks Andrew for the interesting comments.

1 thought on “Cinderella Analysis?”

  1. Dear Ray – I have followed you blog for some time (as you may recall some prior emails.)

    If I may, I would like to offer some opinions regarding market forecasting. I think there is a fallacy in pursuing what I would call “Cinderella Analysis.” By that I mean trying to discern what prior market the current market fits.

    If that were to work, there would be only one market, as the very next subsequent market would have to conform to the (only one) prior market. Or, very much to the contrary and what is probably a more accurate statement, there is (again) only one market – the first one which is still unfolding to this very day and into the future – thus nothing to compare to.

    Similarly, to qualify your opinion with “except for the FED” moves away from your expertise in TA. In fact, I would be looking for you to be ahead of the FED losing its clout by virtue of your analysis.

    So, I would be watching for you to anticipate eventualities by virtue of you assessment of the technical data.

    This is just one opinion, so I hope you don’t mind.

    Best regards,
    Andrew

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