Markets: Is any pattern absolute ?

Markets have one property – their inherent unpredictable nature. Nothing in the market is absolute.
Technical traders are familiar with the an indicator called – Bollinger Bands. These bands are drawn two standard deviations from moving averages. The concept of two standard deviation is: 95% of prices should be inside the 2SD bands. Therefore, when price moves out of the band, it is just a 5% occurence, suggesting that price will come back inside the band.

However, in real life, prices remain outside the bands much more than 5% of the time. Therefore, what should be ‘normal’ is not the reality in trading.
Now, a 20 standard deviation move should occur about 1 in 500 times. This means, that it is almost impossible for such a move to occur. But, the markets have seen not one but multiple occurences of 20 standard deviation moves in the past fifty years. Statistics tell us that such a move should not occur. Markets tell us that it comes about many times.

Therefore, there is no such thing an an ‘absolute’ pattern in the market. But, traders still have to work with some kind of patterns. Therefore, we base our trading on the stock market cycle of Accumulation – Realization – Distribution. We also know that sometimes this pattern will be disturbed or broken in unknown, unpredictable ways.

Nifty – current location in its life cycle

Stocks go through a process of accumulation, realization (when the benefits of accumulation come about in the form of gains in prices), and finally, distribution when smart money sells out, waiting patiently for a correction and a new process of accumulation to buy. This is the Nifty chart, shown in the Bhopal ET-Now Beyond markets camp. I have been saying this on ET-Now for some months – markets are likely to correct before another rally starts. Reader comments are welcome. Also note the lower highs.