Cycles of Expansion-Contraction & The principle of Confirmation.

This is a favorite topic. Old time readers will probably recall that I have written about expansion and contraction, many times earlier.

Markets go through periods of contraction when prices move in narrow range while trader interest comes down. These periods of narrow range are contraction.When markets are doing nothing, they are giving a message. The message is: the periods of contraction see a balance between bulls and bears. Neither is strong enough to take the market in their direction.

Soon enough, one of the two forces – either the bulls or the bears will emerge as the stronger force. Then comes a period of expansion, when the winning force will take the market sharply in its favor, trapping the losing force. This is the period when markets will move with large ranges, in any one direction.

Currently, as I write this on Thursday evening, the Nifty is in a period of contraction. Daily range has come down to just 40 points. Such a narrow range is unsustainable. I expect the market to give a big move, starting Friday.

Arthur Sklarew, is author of ‘Techniques of a Professional Commodity Chart Analyst’. In writing about the rule of multiple techniques  he states:

Technicians know very well that price chart analysis is not an exact science. No single chart technique yet discovered is infallible. Despite this lack of perfection, price chart analysis can very often give reliable forecasts of trend direction . . . Confirmation is therefore an essential component of every valid chart signal. In addition to comparing price charts of different contract months and time scales, it has been my experience that the accuracy of any technical price forecast can be improved greatly by the application of a principle that I call the “Rule of Multiple Techniques.”

The Rule of Multiple Techniques requires that the chart technician not rely solely on one single technical signal or indicator but look for confirmation from other technical indicators. The more technical indicators that confirm each other, the better the chance of an accurate forecast. The logic behind this rule is that, if individual time proven techniques tend to be right most of the time, a combination of several such techniques that confirm each other will tend to be right even more frequently.