From clouds and snow flakes, to crystals and blood vessels, fractals are easily found in nature, and yes, I personally believe along with other technical analysts that fractals exist in the stock markets (human behavior follows a fractal framework). Coined by French mathematician Benoît Mandelbrot in 1975, a “fractal” is a rough or fragmented geometric shape that can be split into parts, each of which is (at least approximately) a reduced-size copy of the whole, a property called “self-similarity”.
I’m not the first technician to say that the markets happen to work in fractals. I believe Brian Shannon wrote a book completely on using multiple time frames in technical analysis, to help piece the larger puzzle on the most plausible trends that a stock will likely behave in your chosen time frame to predict. Elliott used waves, curves and ripples of the ocean to explain the parallel movements of charts in the markets.
This is the 2 year daily chart of Lepanto Consolidated Mining (LC) and a typical chart behavior:
You can use this chart behavior to make your own analysis. You can assume that during the past few days when LC was hovering at 1.80 with the angle of the ascent in a dizzying speed that we were “short term” moving in a delusion stage. These past few days when the stock slumped to 1.46, we oversold and have gone to a short term despair mood. It’s my opinion that we will most likely take a return to the mean.
Returning to the mean does not in any way mean that the stock will go and meet those previous highs. Only time and adequate bargain hunters at possible supports can ever confirm such market action.
On Volume of Transactions
In lofty situations, it is difficult to tell whether those who got to buy cheap (those who accumulated between 40-60 cents areas) aren’t the ones unloading and taking profits in the short term top areas of 1.60-1.80. Nor does that mean that they didn’t average their prices up between the 90 cents to 1 peso consolidation range, right?
With the amount of volumes teetering between an average of 500 Mil – 1.8 Bil worth these days, even if you have 100-200Mil pesos worth of shares, you could get around 20-50 Mil pesos out quite easily without damaging the price, while the stock was going up. Now that the stock’s crashing, I wrote a post on “How To Distribute Shares” which is essentially written by Mr. Edwards and Magee who are considered the fathers of modern technical analysis. If anything else, a simple absence of heavy selling and buyers coming in at apparent levels of support (1.40-1.50) areas – 50% Fibonacci Retracement from the 1 peso breakout to 1.80 short term top, as well as a 20 day moving average provides comfort to those who are gutsy enough to catch a falling knife. Research states that 20 day moving averages hold as temporary support especially for strongly trending stocks.
The volatility in the stock is due to confusion and overcrowding more than anything else. There’s a famous saying in Wall Street, that if everyone is bullish, who is left to be bullish? If you’re trading the short term time frame on LC/LCB (which means you intend to only keep this stock in your portfolio in a week or less), then it’s going to react with every emotional bias that the supply of people caught upwards of 1.70-1.80 are in right now. Nevertheless, if you’re playing the LC/LCB in a medium term time frame (6 months or so)- your trailing stop, although gut wrenching can possibly be near 1.40 – 1.50 (a 50% fibonacci retracement that’s enough to cause your stomach to churn) but is quite a normal and healthy correction given the steep ascent of the stock.
I’d keep things simple. If it breaks 1.40 and can’t find any buyers, we’re going to get a larger correction no matter if Gold prices remain high. Of course, my guess is… there’s enough buyers to rotate somewhere in those levels. Could we diverge though, given that the US markets look to have just rallied below the zero line in MACD which is a perfect rally to short? Check $AUDUSD- looks like a good short area at 1.0710. Place stops at 1.0800 and target at least 100 pips downward for an overnight trade.