Thursday, December 2, 2010

Dec 2: Markets tempted into "kiss of death"

I love the kiss of death: such a cheeky term and, simultaneously, an elegant insight into the capriciousness of human emotion. Perhaps I've waxed lyrically about the simple phenomenon in earlier posts -- surely, I am nothing if not, quite too often, a broken record -- but, should a refresher be necessary, it is nothing but the approach of price to a trendline, where the absolute value of the slope of price is greater than the absolute value of the slope of trendline, and where the slopes of both have the same sign (i.e. both are positive or both are negative). Here's the kiss of death in action:

Technical analysis predicts that a kiss of death will serve as durable support or resistance. As the name implies, the strong momentum of price will be stymied -- in other words, die -- upon touching, or kissing, the trendline.

The intuition is simple. Price momentum, driven as it is by human psychology, "over-extends" itself (evidenced by a high absolute value of slope) in pursuit of the support / resistance of the trendline in question. The momentum draws-in market participants, each one driven by fear of losing out on the move (n.b. fear of losing out is, per trading psychology goddess Denise Shull, the most compelling of human motivators), but this collective piling-onboard suddenly stops when the kiss of death occurs. Why? Because everyone can see it. Though not all market participants cuddle up nightly with technical analysis software, many technical analysis phenomena are apparent on an intuitive level to a wider class of market participants than simply contrarian-leaning TA aficionados.

Put in practical, i.e. non-theoretical, language the above analysis suggests a favourable probability of price withdrawing from the /ES = ~1222 level, though there is no explicit prediction about the degree of withdrawl; perhaps 1218 or 1215 is possible. And all bets are off thereafter. Of course, no TA indicator is always right -- or even 80% successful. Should price top 1225, the bears will no longer have this particular kiss of death as a valid argument towards their market outlook.

Happy trading!

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