A Scientific Empirical Approach

Dear Readers,

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The topic of this fortnight’s article is one I’ve had in mind for quite some time. Being more of a theoretical one, I delayed writing it in favor of more practical ones while the market was looking indecisive [the market now looks likely to have settled into a prolonged multi-month correction as predicted]. The primary aim here is to further illustrate the nature of my TA [as often requested], which is largely a combination of a macro model on the one hand, and the more familiar technicals on the other, that are situated within that larger model. In this sense, the TA, the technical analysis, is as much a synthesis as an analysis. Hence the title of TA - a Synthesis of the Macro and the Technical. I’ll first look at the nature of the macro, and the way in which the technicals work within the macro, and then go on to discuss more specifically the main technical and analytical tools I use.

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The Macro

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The macro is no more than the theory, model, or hypothesis on which the long term projection of price is based. This can consist of various forms of ‘the fundamentals’ that are often thought to completely lie outside the realm of technical analysis. There is an element of truth to this, where fundamental analysis should be considered distinct from technical analysis, but not necessarily radically separate or dichotomous to it. The two may overlap to a certain extent while remaining distinct. Three examples of macro theory that come to mind are s2f, the four year cycle, and the LGC. ‘S2f’ is based on a mechanical theory of supply [the diminishing supply of BTC and/ or exploding supply of fiat lead to a certain price projection]. ‘The Four Year Cycle’, though closely associated with s2f, is more austere. It observes a history of four year cycles on the chart, and extrapolates that going forward. The ‘LGC’ theory is similarly more austere in that it observes in the chart a developing logarithmic growth curve, and extrapolates that going forward. The LGC theory though is also similar to s2f in that it brings a fundamentals into play - whereas the fundamentals of s2f are the perceived mechanical/ causal properties of BTC money supply, the fundamentals of the LGC is simply the phenomenon of a developing LGC. Where one is a determined and mechanical force, the other is a force of nature [original 2018 discussion on the LGC here]. That the development of market price could be subject to a force of nature is perfectly conceivable when you consider the market is not a machine [not ‘efficient’], but a collective of market participants involving crowd psychologies and human behavior, i.e.; a stupendous force of [human] nature. Of course, over and above this purely descriptive approach is the question of what an LGC in BTC could mean. I’ve frequently explained it as a process involving the capitalization of a nascent currency. Further reading on this point here.

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A Focus on the LGC

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So all observations are theory-laden, no matter how much one tries to obscure this fact of human nature in a cloak of pure objectivity [pure analysis]. Like all theories, the LGC is fallible, and like all theories it is considered only a working hypothesis until falsified/ invalidated, where it would no longer work. A pragmatism is at play here as opposed to a dogmatism. With this in mind, with this hard-wired into the notion of a theory, one will never be over-exposed in betting the house on it. This larger and fallible theory functions for TA as a context within which longer-term movements, as analyzed by the technicals, are ‘pegged’. Where ‘pure’ technicals, stripped of all context, tends to go from the smaller to the larger, the way in which my technical synthesis works is to have the larger feed into the smaller [once again context]. This not only works with the larger macro of the multi-year projected chart feeding into the more medium term, but also works with the medium term feeding into the more immediate term. And this works in your favor insofar as it observes a basic principle as illustrated earlier in the fourth paragraph of this article, where the higher the time frame, the greater the probability of getting the projected trend right. Of course, a theory is further validated or confirmed if its predictions lead to results. On the basis of the LGC, a few significant [and contrarian] calls were made and subsequently confirmed -

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As mentioned earlier, predictions of trends on the higher/ greater time frame are always more probable. An example of this is my medium term theory of lengthening cycles has possibly been invalidated [certainly made problematic by the recent parabolic rise to the top of the channel] just as the long term theory of the LGC was further validated. This point was further discussed here.

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So the LGC has performed well so far as a macro model on which to hang the technical analysis of medium-term price action. One thing it can not do is provide predictions for more immediate movements in price, movements which I find increasingly random, and more like subject matter for the gambler as opposed to the trader/ investor [something covered in the article first linked above]. The beauty thus far of the LGC is that though it may not be able to provide shorter-term price predictions, which are near impossible anyway once the ‘animal spirits’ take over [irrational exuberance to the upside on the parabolic rise, and equal and opposite irrational fear to the downside on the capitulation], it does manage to ‘contain’ or capture the hugely volatile moves within its channel on the longer-term time frame.

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Another point to touch on here is the scientific empirical nature of the macro being utilized. Anyone familiar with the history of science will know that its progress is made on the basis of hypothesis, and then of observation of predictions made on the basis of those hypotheses. Empirical science itself is a synthesis of theory on the one hand, and observations/ predictions on the other. The best theories, in the marketplace of ideas, are taken as provisionally true until a better theory comes along. A point I make in case some may think this approach lacks a certain ‘rigor’.

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The Technicals: A brief discussion [not exhaustive] of the main tools I use.

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The Logarithmic/ Geometric Function

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Though distinct, there is no clear and utter demarcation between the macro and the technicals here, where each touches on the other. For example, though the LGC is a macro concept, it arises from an extrapolation of the trend as found on the chart - it has a foot in the technicals, which is first and foremost based purely on actual price development in the market as found on the chart. Of course, before you can see anything in the chart, one first needs to make sure that they are reading it on the logarithmic scale as opposed to the linear scale. Where the linear scale involves simple arithmetic/ addition, the logarithmic scale involves geometric/ multiplicative values. These real values are measured in a proportional way. This is a crucial point that I’ve previously discussed here. It is due to this scale, which measures spatially the exponential increase [and decrease] on the vertical/ y axis, that much of the technical analysis on the chart takes on a geometric character. To give an example of this geometry -

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Here you have a long term chart of ENJ/ USD on the log scale. Notice the ascending triangle formed at the base, and the vertical extension of the height of that triangle to project a shorter term target. And sure enough [though there is never any certainty], this price target was hit before the inevitable correction set in. Conceivably, we’ll see another ascending triangle form, with its point of resistance the previous peak price. A measurement of this can be taken [effectively a spatial measurement off the y axis], moved forward, and situated above the peak price level to give a price target going forward… such as the projected price action in blue represents.

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The Fibonacci Tool

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As in the example of the above chart, the fib tool [always to be set to the log function] is essentially about providing levels with which to work, whether they be retracements or extensions. The extension on the left provides a price target, the retracement on the right provides levels to which price is likely to correct. Generally speaking the more massive the previous move up, the more likely the lower levels are to be hit. In our example, with ‘only’ a 13x move up, I’m thinking the 0.61 [61%] level of retracement likely, perhaps even lower [0.78] on a more extended correction… or a complete capitulation. Notice also that the fib tool can measure time. As a rule of thumb, it’s reasonable to think that a correction may last as long as the previous parabolic rise. It is due to a lack of the appreciation of time/ duration that many buy on the early bounce… the bullish market mass-sentiment accumulated on the parabolic rise has yet to dissipate [see the contrarian article for further on this].

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The Mean of Prices/ Curve

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On many of my alt charts, you’ll see this long curve at work, which is meant to function simply as a mean of prices, not as support as a simple trend line is meant to do. The basic principle at work here is ‘reversion to the mean’ - price can under-shoot this curve just as it can over-shoot it, where the curve serves to effectively bisect the price action. The general function of this device is to get a sense of the long term trajectory of price, of the ‘cyclical’ dynamic, over and above all the daily volatility in the interim. In extreme deviations away from the mean price curve, you can see where price is getting over-heated and due for a pull-back, just as you can see where it is coming back to a more opportune time to buy.

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The MACD

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Finally, a word on the MACD. This is by far my favorite conventional indicator that I use. Used properly [on the log scale once again] it is packed with information. Though primarily a momentum indicator, it can also show when a coin is over-bought and over-sold making the RSI largely redundant [always look for efficiencies in your analysis]. The reason the MACD works so well in my opinion, especially on the larger time-frames, is that momentum is measuring the crowd phenomenon of a market, and a market like a super-tanker at sea, takes quite some time to change direction - markets have a dynamic, an inertia, and a momentum all of their own . Unlike the RSI, which simply measures how relatively over or under sold something is on a scale of 100, the MACD is an averaging of prices of a set of moving averages. Given that it involves nominal prices, this indicator needs to be converted to the logarithmic function. Without this conversion, it is only usable on the shortest time frames [the least interesting and relevant to longer term analysis such as mine]. Notice, charts with the MACD are near always on the weekly. Further information on the MACD here.

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To sum up, it’s been my aim in this article to show the way in which the macro serves to orientate the technicals in my TA, and also how the technicals in turn feed into the macro. To ask which comes first would be to betray an overly linear way of thinking in my opinion, where simple causation is the sole mode of intelligibility/ interpretation. It is all a bit more nuanced and…. dialectical than that. Indeed, consider the technicals without the macro as blind [short term charts], and the macro without the technicals as empty, and you are someway toward understanding my approach. For no small reason is ‘synthesis’ the dominant word in the title, for it is the dual function of the intellect to synthesis the various parts into a whole, just as much as it is to divide something into its constituent parts [analysis]. The most comprehensive TA then will look to combine both, to use all the tools at its disposal in the attempt to make sense of what would otherwise be random price phenomena on a chart. In short, a comprehensive TA should not throw it hands up in despair and say future price is unknowable [for why else would one buy], but be bold and brave enough [though never reckless] to sketch out some reasonable system for price going forward, however hypothetical and fallible it be.

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Until next time,

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Stay [relatively] safe out there,

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Dave the Wave~~

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