Technicals versus Fundamentals
Fundamentals versus Technicals
What drives the markets? Is it an intellectual appraisal of the the fundamantals or a visual appraisal of the price action, as represented by bars or candlesticks on various charts in various timeframes? Or is it the coincidence of the two? For example, in the chart below, of the Dow Jones Industrials, the sub prime mortgage disasters had dried up liquidity in the credit markets causing the stock market to sell off.
Dow Jones Industrial Average
Chart Courtesy TradeStation
The industrial average had been sold off for five straight days without any sign of support. The overnight markets in Asia, on the 22nd of January, were being beaten down quite badly and the Federal Reserve decided to take preemptive action before the US markets opened on the 22nd.
The Federal Open Market Committee decided to lower its target for the federal funds rate 75 basis points to 3â€1/2 percent. Coincidentally, the market had been sold off to the 150% retracement support line of the move from the August 16th low to the October 11th high.
So traders who were watching the technical levels at around 11680 were looking for an opportunity to buy the market while Fed watchers, waiting for an FOMC announcement, were also waiting for an opportunity to buy the market. Usually technicians wait for a 162% Fibonacci retracement to really get their juices going while analysts would have contemplated the Fed action at the next scheduled FOMC meeting. However, the preemptive move by the Fed, at the 150% level, and an announcement earlier than their anticipated meeting, produced the momentum to cause a stock market rally.
Had the charts forewarned of such an event or was it the knee jerk reaction to the Asian markets, which were presaging a severe sell off on Wall Street, thus signalling, (to the Fed), the urgency of needed action?
Either way, the confluence of technical chart levels combined with market action, no matter what the cause of the momentum, is a sure way to stack the probabilites in favor of a profitable market trade.
