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Professional market players know that "clean" numbers like 13 or 14,000 have at first a magnetic quality, then a repulsive quality and then a destination quality. Markets will push towards these kinds of numbers, say Apple @ 500, and then quickly retreat the first one, two or three times they get there. Next they will make it over the number, at least for a short while, and after a typically strong push through, trade in the near vicinity of the "clean" (ends in zeroes) or "round" number.The terms professionals use are resistance and support - i.e. the "market" resists realizing 13,000 and then becomes dependent on that interpretation.
What's going on here? Why is that pattern so repetitive and if one thinks about markets, how should they think about it?
First, everyone should remember that market numbers are simply a language. The numbers and their movement reflect the collective perception of millions of market-game players worldwide. And in fact, it is first of all the speed and rhythm of this language that means more than any actual number. If something moves fast and furious through one number, you can be just about guaranteed it will reverse back through it.
Second, just like a language, one should always remember than any number only has meaning in context. DOW 13,000 is optimistic news in 2012 but it was very bad news in 2008 when we were coming at it from above rather than from below.
But what does all this mean to the mass majority of investors whose investment dollars come from their non-investing professions? The biggest thing it means is that said average investor may be better at understanding when they should be getting in and getting out than the pundits lead them to believe.
This is because, at their core, markets are human beings placing buy and sell orders on the perception that other human beings are going to buy or sell at better or worse prices. This is called Theory of Mind and as anyone psychologically oriented understands, we ALL have theory of mind abilities. Research in fact shows that using our abilities to predict other people gives us a leg-up on those who are using only math.
Could it be that to stand back and think of market movements as dances, to understand the meaning of the numbers in their context and as a language and then to decide whether to buy or sell would be a better idea?
Don't be fooled. Markets are 100% psychological. There are a million ways to analyze them and one of those ways is through a purely psychological lens. Someone with a familiarity in say group psychology should apply what they know about crowd behavior to the question of why a market is moving a certain way. I submit that spending three or four months or even a year attempting to understand and predict markets this way, will yield better results than you could ever imagine.
