The short answer is I don't know. To really understand this, we need to first understand why the technical analysis works since all my prediction was based on the technical setup. It won't be surprised for me to know that a lot of people have significant doubt on the technical analysis to guide for trading. I was one of them as I also very much doubted the technical patterns based on the past price actions could really foretell what is going to happen. However, after many years in the market with learning and practicing, I've finally changed my mind and am rather convinced now that the technical analysis indeeds works for trading. Why so? Well, in a nutshell, the price actions in stock charting are actually a collective reflection of the traders' behaviors or their psychology and mindset. Over years, people have identified certain patterns and trending lines that often indicate some extreme conditions that may trigger a turnaround soon. For example, when the market is overbought to some extreme extent, it means traders are very complacent and are thinking the world is in a perfect situation. But we all know, the world is not perfect and it is almost a 100% certainty that there will be something devastating to happen somewhere in the world. I don't need to know what is going to happen but I know something will happen to trigger some nervous reactions to bring down the market. Conversely, if the market is extremely oversold, it means people out there are very nervous, expecting the sky is falling. But we all know the sky has a habit of not falling. In this situation, just a little bit good news could trigger a great relief among traders to start to buy aggressively. Of course, nowadays the high frequency trading by institutions based on the predefined technical patterns has further enhanced the predictability of the market movements based on technical analysis. If you pay attention to my calling for the support or resistance, you may have realized that the markets indeed often move around within the limit of those lines in the short term. Before I finish, let me remind you of the 2 recent examples about the macro-trends that I accurately predicted:
- I was long for the Chinese market probably a year ago and made some good money for its initial moving up. But starting from about 2 months ago, I got really worried about the Chinese market. Technically it was extremely overbought and I called it a gigantic bubble to be burst. I even went so far to say that this bubble would end up with deadly tragedies. I was a bit too early but eventually we all know what has happening to the Chinese stocks. We have seen a lot of theories about what were the causes of this epic stock crisis. I'm certainly not smart enough to know exactly what has happened. But I try to keep a simple mind for myself. I still believe the historical bull market for China is far from over and will resume sooner or later. But technically it was way ahead of itself a couple of months ago that for sure would lead to a crash. While the Chinese market is rallying at the moment, I don't believe the correction is over and the bottom is necessarily formed. Purely from the technical perspective, there is a good chance that the Shanghai index will test its recent low again in the next few weeks and a lower low may finally allow the formation of a solid bottom. Of course, this is a very simplistic technical analysis and a lot of things can change its course.
- I have been calling for a downtrend for the US stock market for about a couple of months as well. Did I know the Greek crisis would trigger the 300 points decline for Dow Jones just a few days ago? Of course I didn't. But the technically I knew traders were too much complacent and were too bullish for the near future. So even though I didn't know what could bring down the market, I knew something problematic would happen to trigger the downturn.
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