Hi Graham.

I appreciate the point you raise but what you’re really asking is whether “fundamental” rather than “technical” analysis should prevail.

I have been asked about the “fundamentals” a number of times since writing this article but the truth is (IMHO) you either abide by one or the other. Fundamentals may well give you the tools to try to predict where a market is heading but, for me, fundamentals are a backward looking indicator — which is why I prefer the technical side. I’m not saying that fundamental analysis has any more or less value than technical analysis but I would say that you try to mix the two at your peril.

Regarding fundamentals, we a) have no idea who may have been privy to news before it disseminated to the wider world and b) quite often, the market interpretation of the “fact” when it breaks may well be different from what you may have expected it to be prior to that event (think of the old markets adage of “buy the news, sell the fact”).

On the other hands, if you want to look at everything from a “technical” perspective, you don’t really care. Whether fundamental news is interpreted correctly prior to the event, or else interpreted differently to have you might expect after the event is of no consequence. All of it will be wrapped up and interpreted by the chart which is, of course, just a record of how humans reacted to information about something over time.

I can recall countless examples in my time trading markets whereby this was the case. Two recent obvious examples would be the market reaction to both the Brexit vote and Trump win. The “fundamental” assumption prior to both events was that a victory in each case would send the stock markets into a tailspin. Both markets showed signs of concern and high volatility (to the downside) in both instances in the days/moments before their respective results. However, as is plain to see, the markets reacted in the exact opposite way once the results were in and digested. I specifically recall sitting on a beautiful terrace with my best friend in the Balearic Islands around the time of the Brexit vote. The stock market was still making its mind up but I’d been studying the Dow Jones Industrial Average closely and, to me, it looked like, from a technical perspective, that it was about to explode higher. I told him so and he looked at me like I was completely mad. He congratulated me some time later:) The Trump result led to the same outcome.

There’s even a good example when it comes to bitcoin. It was late September 2013 and my prediction that we were currently in that particular fourth wave correction was still holding good. All I was looking for was the final short “fifth wave” down to complete the 5 wave triangle pattern that had been forming since the previous ATH in April ’13 — before the next Wave 5 up started.

We then got the unexpected news that The Feds had shuttered the Silk Road and arrested its operator. The instant reaction was what you would have expected i.e. the market sold off sharply from ~$120 to ~$80.

Fundamentally, the closing of the market that has given bitcoin it’s initial reason for being and value had been closed — surely bad news? But the same news was quickly re-interpreted as “good” for bitcoin in general and the fifth wave rally over the next 2 months to ~$1150 started on its way.

One item of news fulfilled 2 expected and opposing outcomes on the same chart.

The examples you provided are simply part of the story.

Like all of us, I am totally unqualified to predict, interpret or, quite frankly, understand how human beings react to anything!

Thanks for reading and for taking the time to comment.