Random, Or Not?

Lots of people get frustrated with markets for seemingly random behavior. The reputation is not completely undeserved. However, sometimes events in the market trace out patterns that seems anything but random.

Case in point: The sell-off and subsequent rebound in October. It takes the cake for symmetry. The pattern traced out in the past two months is truly amazing, an almost perfect “V” shape low, with proportions that almost make it look deliberate, like somebody drew it by hand. Well, maybe not THAT deliberate, but amazingly close, considering this is the stock market.

S&P 500, hourly bars

S&P 500, hourly bars

Maybe it is just random. Maybe it is just coincidence. Its striking nonetheless. What is also striking is how the market bounced off of the long term lower channel boundary (the lightly upward sloping red line on the bottom of the chart) after violating it, almost like it was a trampoline. This is the multi-year rising lower trend-line that goes all the way back to the 2009 and 2011 lows. This was an important level to hold; the fact that it did hold was both a very bullish signal, and a fantastic early indicator of a buyable bottom after the scary decline in early October.

Its also a vindication of the technical approach to stock market analysis, particularly for indices. Indices and asset classes that move based more on macro-level, systematic drivers, such as growth, interest rates and trade flows, lend themselves to technical analysis much more so than individual stocks, which involve more individual business risk. Its the systematic price drivers that technicals help model, and there’s decades of research to back this up. Basically, indices and macro level assets do tend to behave in certain ways at technically identifiable levels.

This is far from breaking news. Still, when you see it working in action like we did in October, its worth mention. It never fails to blow me away.

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