Warning! This may be somewhat complex but it is important to understand the big picture: complexity and formulas exploit the masses.
In the stock market as well as the commodities market, the current problem is that there are so-called technical analysis “experts”. These people are guided in their investment decision-making by technical chart patterns. These patterns or “signs” have become a mini-industry of the brokerage firms to suck unsuspecting, intelligent people with a PC and an Internet connection into investing in an arena of sharks. There are hundreds of technical indicators that have all at one time or another led people to believe that they were the “Holy Grail” of generating huge profits. The huge profits were made by authors who sold the formula in newsletters or books, PC programmers/investors, and the brokerage houses that handled the trades. It has been estimated that 95% of the technical traders lose money. The big boys simply and quietly say “thank you”. Have you ever noticed the huge trading volumes in recent years?
This reality is the reason the Goldman Sachs and JP Morgan Chase can achieve such profits with relatively little cash targeting strategic price levels and times. Their tremendous treasuries allow them to “paint” charts giving the illusion to the technical traders that it is time to buy (or sell) the investment target. By creating the illusion with the use of tremendous computing power and investing capability, they use the emotions of the traders to their benefit. Once they create the perception that the stock is getting ready to make a move, then the usual group of “experts” tell us why something is moving on the chart when more often than not, the action on the chart is in contradiction to the fundamentals of the underlying investment value. The emotion of fear kicks in and the trader dumps his position and takes a loss.
Short term technical patterns will always overrule longer term fundamentals due to the amount of money at stake. Undercapitalized traders cannot afford to let a position move against them for any period of time. Margin calls (A broker’s demand on an investor using margin to deposit additional money or securities so that the margin account is brought up to the minimum maintenance margin. Margin calls occur when your account value depresses to a value calculated by the broker’s particular formula) dictate how much capital an investor can lose before they must abandon their position. This reinforces the technical move and this continues until the bigger, well capitalized, long term fundamentalists move in and put an end to the technical play. It happens repeatedly in markets and always will as long as the current system exists. This is the reason that fortunes are made in the markets and why only a few succeed. Only those who actually understand the markets and realities of the big players’ manipulation will reap the big profits as well. The regulators either don’t know how to identify this manipulation or don’t care to address it.
This last week, the US dollar has gained in strength sending gold downward. Do you really think that with the massive creation of US dollars that it is the investment of choice. The charts and technical indicators say “Yes” but the fundamentals scream “NO”! The boys are at it again. Management by Perception and public apathy is alive and well in the US. As long as we are promised to by taken care of and receive some more tax credits, everything will be OK. In a previous post, I directed you to the youtube presentation of exponential curves and their ramification on society. We are crippling the next generation with a crushing burden of exponential debt and at some point it becomes mathematically impossible to realistically pay it back. All that is left becomes either a default or a currency devaluation. The interest alone will become unsustainable.
The borrower (on margin) is servant to the lender. The sharks will continue to sucker the technical traders in releasing their wealth to them. Once again, the ego will cause you to give up hard earned cash in quest of being that one trader who finally uncovers the “Holy Grail” of technical indicators. Faster computers, newly developed technical indicators, more complex environments will not make you money over the long run. The best way to trade is to be still, listen to Our Heavenly Father who is well aware of the entire picture, then act if and when HE says to invest.