From time to time I like to to present novel (the bigger the better) ideas here, something society is in dire need of and not profitable enough for the big newspapers. Consider this post as one of those novel ideas and read at your own peril.
As W. D. Gann said, (quoting liberally) people watch what stocks do but not how they do it. To someone who has spent countless hours watching tickers, that makes a lot of sense. To me, it almost seems like stocks are invested with a will of their own, but like each one of us they follow certain rules. Unravel the mystery and be rich! Unless you believe the - easily disproven - "efficient markets theory", the question becomes: why do stocks do what they do?
Like humans, stocks have a character and they even have compulsions. How else (save manipulation) do you explain that a stock will move in a certain range for many years? It is completely irrelevant, to the investor, whether that is just the reflection of mass psychocology. Fact remains (which I'm happy to show to anyone on a chart) that stock movements are anything but random. A fact which might surprise some Nobel prize winning economists.
There is this idea in Jungian psychology (which I've studied for a quarter of a century, and probably am it's last "pure" exponent) that something with a symbolic charge, can and will take a life of its own (folklore and mythology are full of stories to that effect, just think of the Golem). All this to say that they're not so different from us, humans: they have a character, they have compulsions, they have fears, and so on.
Support and resistance zones, being known by every investor, show that better than anything else: why is it that a given stock is "afraid" of rising above a certain threshold but regularly finds support at another? The honest answer is that I don't know. But the fact is that stocks will revisit certain price ranges again and again, that they abhor gaps ("fill the gap") in price, move in identifiable - at least in hindsight - patterns which happen to be consonant with fundamental proportions. Sometimes, it is almost like a stock "forgot" to do something, only to remember it a little later - and the pattern will be complete. History rhymes but never repeats.
Do you know why your neighbor does the things he does? Do you know why you do the things you do? I might have mentioned it before but Stephen Wolfram's incredibile book, "A New Kind of Science" gives (some) answers to these questions (you can find a free high resolution PDF on his own site. If you don't have the time to read it all, settle for the first chapters).
Considering what I've learnt reading that book, I can't help but wonder if there isn't more than the sum of it's parts at play here. What if stocks really did have some kind of consciouscness? Before discarding this idea as preposterous, just consider that a simple (two dimensional, next neighbor) cellular automaton, or - to keep things simple - a glacier can do the same computations your fancy computer with billions of transistors can. Or that, even knowing the rules of said automaton, we cannot predict its outcome - or that of the glacier. Sure, it may take a couple of millions (or billions) of years longer than it would on your PC, the cellular automaton is what computer scientists like myself call "Turing complete". Put differently, it can perform any possible computation. The magnitude of these two facts is hard to portray or overstate. It's one of those things that simply makes the head spin spin. Personally, I find such toughts intriguing - even if they lead to nowhere. That is, apart from there not being such place as "nowhere" (the fact that we use the word everyday says a lot). Such ideas make us stop to wonder, and reconsider our place in the universe. Is it really the place we thought it was? Are things the way we thought they were?
When considered as a reaction to human emotions (sensu lato), the behavior of stocks isn't so surprising. But what if there's more to the story? The more you watch a stock's price movements, the more you feel that it does what it does on it's own. To be clear: consciousness is not the matter of this story - because to this day, no one can conclusively answer the question whether we ourselves are conscious. (A question with big implications to say the least, yet another reason to read "A New Kind of Science"). And since we're at it: can you prove that any given person other than yourself possesses consciousness?
To anyone who has spent countless hours watching tickers and studying charts, this story ought to have a familiar ring to it. But, regardless of the reason, I can't help but notice that stocks behave very much like human beings. Some never cease to reach for new heights, others trade sideways for decades and yet others reach never reach bottom.
The longer you study stocks (and their movements) the more apparent their personality becomes. Certain prices will recur, over and over again (an area which our first tool "PESO" will allow you to investigate - without wasting your time). Since it's myopic to look at only one dimension (price) I'll add that their behavior through time behaves exactly the same way: patterns emerge, which oddly enough agree with fundamental numbers of the universe. Indicators based on the Fibonacci ratios and Gann angles - to name just a few - do a surprisingly good job at capturing price levels at a given point in time (unfortunately hindsight is always 20/20). In essence they try to measure these invisible "rules" that stocks seem to follow. In other words, while I might have expanded upon it, it's anything but a new idea! Traders have made billions with simple instruments such as these (remember: no strategy work unless it is truly your own!) The verdict is that current methods should be much better than they are.
To be wholly honest with you, I do believe that markets have their own form of consciousness (this has a very solid basis for which, once again, I refer you to the book linked above). A form of consciousness that may be evident to the alert observer. Do they have will? I guess you'll have to answer that question for yourself, though the very idea goes against everything we've been taught about economics. For what it's worth, I don't believe that human beings have any free will but only the illusion thereof (burn me at the stakes for my heretic ideas). The simplest explanation I can give you is that it's not needed and nature abhors futility (Occam's razor). Can you prove differently?
All of the above, is a question that I like. It's one of those big ideas that makes you look at the world differently and look at stocks in a completely new light. Dilemma's such as these motivate me even more to find the driving force behind stocks, because the common theories don't even come close - and perhaps, speaking as the psychologist, learn something about human nature as well.
Always remember that there is no such thing as easy money, hence you need ideas that motivate you and give you new angles to learn, because profit in the stock market follows from work and study. To put it in other words: if we look at stock prices like we would at any living being we might learn a thing or two (and vice-versa).
If you have enough imagination it might very well be a profitable one! After all, the world is contained in a grain of sand and history rhymes but never repeats exactly!
PS: I'd be delighted to discuss this - or any other - idea with you by email. For what it's worth, there are no experts in this field.