Reality provides the ultimate test of all ideas. Since Monday of this week, the DJIA has gained 813 points or about 7.42%. But someone could claim that a recent call for Dow dropping to 4,000 by a well-respected analyst regarded only the longer term. Well, my answer is still that you do not need chart patterns or any kind of analysis to make that call. The probability of any drop and of any size is finite as is the probability of any rise. The more extreme is the call, the lower the probability for it happening. I intend to have another post with the mathematics that prove this statement in the near future.
Just a few days ago, on Saturday, November 26, 2011, I posted an article here with the title “Dow 4,000? What Technical Analysis Says or Doesn’t Say About Such Possibility” In the article I tried to refute the idea that single instances of non-regular, or non-standard, formations on long-term charts carry any significance at all. Like always, I followed my principle of not mentioning names of fellow traders or analysts in my writings when I do not agree with them and my objective is to refute them. Naturally, there was a reaction with counter-arguments and along with it came also accusations about my skills and personality but reality says that I do not need to defend myself.
Below is part of the response I posted in in a place where I received some personal attacks because of my attempt to discount chart patterns formed on long-term log charts. I have removed any names because I hate personalizing technical analysis.
“There are several reasons I did not mention you and several others that before you have alluded to the same scenario. Traders have identified the pattern you showed long before you, whether arithmetic or log. This is an example to prove that your idea was not original:
http://www.online-stock-trading-guide.com/dow-jones-forming-a-head-and-shoulders-pattern.html
1. I did not use your idea, which was not original, to get credit for it. Actually, I tried to refute it.
2. My rebuttal did not concentrate on the use of semi-log charts but on the use of isolated instances of dubious formation of very long term charts.
3. The Internet is not an academic, peer-review, process but a place where all kinds of people with all kinds of intentions gather. I have disabled comments in my blog because I got viruses several times in the past by accidentally clicking on posted links plus I don’t want to deal with all the insults, spam, etc. More importantly, I wouldn’t like my followers to come in and start saying things about other people the way some of your followers expressed themselves about me in your blog.
4. I did not dispute log charts as your title implies, wrongly of course. I said log charts are very useful. I also said that you might be right after all. I only disputed the pattern.
Actually ….., I would not be surprised to see Dow dropping to 4,000 after all the debt problems the world is facing. That would be a disaster of course in many fronts. I will also be the first to say, “Hey guys, …. said this was possible”. I think you have a lot of experience and you do not need to justify what you foresee based on some pattern. I appreciate much more traders who have a good feel of the market than those who accidentally predict a move based on dubious analysis”
So I think after my response above and replies that followed this issue is now resolved. I also forgive all those who attack me personally. No hard feelings…
