From: cjkuo@locus.com (Chengi Jimmy Kuo)
Subject: Re: correction is nigh
Organization: Locus Computing Corporation, Los Angeles, California
Date: Tue, 14 Apr 1992 21:17:05 GMT

chuckb@tc.fluke.COM (Chuck Bowden) writes:

>In article <1992Apr09.171335.111797@locus.com> cjkuo@locus.com (Chengi Jimmy Kuo) writes:
>>v098p82f@ubvmsb.cc.buffalo.edu (NEUTRINO) writes:
>>
>>>hello folks,
>>>   AS you are all aware, the market has seen a big decline over the past two 
>>>days. The big question is, is this the market correction we have all been 
>>>expecting, or is it just an indicator of edgyness out there? This 
>>>"correction" wa only about 4%.....seems like either a really small
>>>correction or a relly big tantrum!
>>
>>>What are your thoughts?  Also, what would a true contarian do at this time?
>>
>>I have said since February and reiterated in March,
>>
>>We shall see 3130 before we see 3370.  Yesterday we got down to 3141.
>>So far, I don't think it's been any big deal.
>>
>>Jimmy Kuo

>Please keep the bear market predictions coming. It seems to be helping.
>The DOW is over 3300 today (4/14/92).

That wasn't a bear market prediction.  It was defining a range for the
market while saying it wouldn't break 3370 unless the market tests and
supports around 3100.  Did you get to read the followup?  Specifically, 
it's no big deal that it went down to 3141.  And it's no big deal it's 
at 3300 today either.  It will become much more significant when it 
breaks out of the range.

Let me take you back to last year.  There was a trading range established
for the market between 2850 and 3050.  But most of the time, the DOW
fluctuated between 2950 and 3050.  The concept was/is, it wouldn't break
3100 (~1% > 3050) unless it tested and supported at 2850.  Now, add 250 
to each of those numbers and you roughly have the scenario over the last 
couple of months.

I think this is just one more case of someone not understanding technical
analysis.  I hope that if you read enough of these posts, you'll at least
understand it.  Then you can make a judgment for yourself as to whether
you believe in it.  That's a separate issue than understanding it.

Earlier, in a different debate, I made the mention that technical analysis 
was a study of mass psychology, not of charts.  Let me try to translate the 
above arguments into mass psychology so you can decide for yourself.  
(Unfortunately, in the above set of numbers, I have completely disregarded 
a component of technical analysis which is "volume."  Technical analysis 
requires price movement along with volume to support its claims (and thus 
its interplay as *mass* psychology).)

Let's start with lots of people buying and selling at the previous highs
(3050-3100).  The sellers would include previous people who bought at
3100, sufferred through a downturn, and are now happy to get even.  Other
sellers include people who saw that the market didn't get past this level
last time so want to secure their profits.  If there aren't enough buyers
(whatever the reasons), the sellers prevail and the market goes down.

The reverse is true at 2850.  Sellers who don't want to risk a market
breakdown.  Buyers who saw it didn't get lower than this last time.  But
most important and why the market stays within ranges is, over the last
N months, most of the owners bought inside the range (by definition).
These would include the value averaging types who buy more when it gets
down, etc.  So there ends up being more buying at the low end of the
range and less at the high end and the appropriate side wins (it gets
support at the low end and not enough buyers at the high end and we can
live like this forever).

But something happens and you break the range.  Enough buyers all of a
sudden show up at 3100 such that it doesn't go down this time.  From
hindsight, that must have happened else we couldn't have gone up.  The
buyers had to overcome the sellers.  In this initial up wave, all the owners
are holding onto a paper profit so few people want to sell.  But of course
everyone has their price so there are some who will sell.  But there are
still those buyers out there (the buyers that caused the breakout and
others who see this and are now jumping in).  Thus the initial breakout
is explosive due to more buyers chasing few shares.

At some point, enough sellers show up.  How?  Most people have their
"price."  Some people say to themselves, "If the price doubles, I'll
sell."  For some, that's 50%.  But whatever, at some point, enough
people decide they're willing to sell thus causing an equilibrium.
However, at this point, all those people who were hanging on because of
the meteoric rise see that it's no longer going up.  Once enough of
them decide to cash out, the sellers group expands and the market
turns down.

The basis for the 3340 figure is that "enough people" will have their
threshhold crossed when the amount of this move matches the amount of
the previous move.  (~2850->~3080->~3340)  And thus begins a new cycle.

This is the technical analysis explanation for "ranges."  There are
other explanantions for other types of movement.  But each one of the
explanantions is based on mass psychology.  It just ends up that you
play with numbers a lot.

Jimmy Kuo
-- 
cjkuo@locus.com
"The correct answer to an either/or question is both!"
Newsgroups: misc.invest