“Prediction is difficult, especially of the future.”
-Niels Bohr, 1922 Nobel Laureate in Physics
Fundamental & Technical Analysis
We are endowed from birth with ample hindsight. Foresight on the other hand must be stimulated and nourished. Reliably accurate forecasts for the S&P 500 Index or for Crude Oil cannot be made on the basis of luck or fundamental analysis. To predict prices with consistency the price action must be analyzed directly. Technical analysis studies the price action in order to forecast the likely duration and extent of price trends. Our analysis begins and ends with the price action itself.
ICAP Technical Analysis builds on over thirty years of continuous study of the price action in the financial and commodity markets and, prior to that, on post graduate research in complexity theory and turbulent systems.
The verdict of our long experience with the markets is clear cut. A properly constructed and executed system of technical analysis can predict the duration and extent of price trends. Fundamental analysis is largely logistics and has little value when it comes to forecasting price swings. To those trained in fundamental analysis, the notion that the price action of a market can be predicted without any assistance from the fundamentals may at first appear sharply counter-intuitive. For those who live and breathe fundamental analysis, we must emphasize that technical analysis is not another way of doing fundamental analysis. It is a completely separate and unique approach with its own tools, terms, language and grammar.
Fundamental analysis is designed to estimate the forces of supply and demand. For an oil company fundamental analysis is an essential skill. Success in this skill enables the internal supply and demand balance of a petroleum company to align with the larger supply and demand balance of the market as a whole. Otherwise one can end up with too much of what no one needs and not enough of what everyone wants. This is logistics. In contrast, the strength of technical analysis is price prediction. There is one tool box for fundamental analysis and another completely different tool box for technical analysis. Fundamental analysis sells a story of shifting forces of supply and demand. But the price action of a market tells its own story. It is a story of how collective human behavior reacts to scarcity and surplus in a predictable and mathematically precise fashion.
Whenever any market is large enough, complex enough, and turbulent enough, the resulting price action will tend to spontaneously organize around a well defined set of price patterns. And these price patterns are spontaneously organized around Fibonacci ratio retracements and Fibonacci multiples. The larger the markets and the higher the degree of turbulence, the more precise will be the resulting Fibonacci based price structures.
The dynamic relationship between complexity, turbulence, Fibonacci ratios, and collective human behavior is a core reality of technical analysis. Fibonacci ratio relationships have been observed structuring turbulent systems across many scales of duration (time) and extent (space). Expressions of the complex inter-dependence of turbulence and Fibonacci based structures range in scale from the spiral arms of disc galaxies, to the structure of hurricanes, to the price structures of the markets.
Perhaps the most intriguing display of the spontaneous, self-organizing tendency of complex, turbulence systems to produce Fibonacci based patterns is in the price action of the markets. Here the size of the market (open interest and trading volume) and the average volatility are the critical factors. The larger and more turbulent the market, the more precise are the Fibonacci ratio relationships in the resulting price action.
There is a very practical implication to these observed patterns. By defining the principle types of patterns and the key Fibonacci ratios involved, the price action of a market can be predicted days, weeks and even years in advance. This phenomenon was first discovered by R.N. Elliott in the 1930’s as the result of an extensive analysis of stock market price action. His research was truly ground breaking. It was not until the 1990’s and the advent of cheap computing power that science was able to develop a theoretical understanding of why Elliott wave analysis works so well. That would be the science of Complexity Theory. Large systems, whether galaxies, hurricanes, or markets are not chaotic. They are complex. And unravelling the many layers of complexity can allow one to predict the outcome of the system.
The approach of ICAP Technical Analysis can be best described as time cycle based price pattern analysis. The tools that we employ to identify and track those patterns include classical chart pattern analysis, candlesticks, sentiment and momentum studies, time cycles, seasonal patterns, and of course Elliott Wave analysis. And a big part of what we do is educational. Our approach is definitely not “trust us we are professionals.” Our primary aim is of course to give useful market analysis. Our secondary goal is to educate our clients in the science and art of technical analysis. Our market analysis can then become a collaborative joint venture that includes our output and feedback from our clients.