Right timing is often more important than the correct forecast
For the majority of traders, this experience is often frustrating due to the lack of certainty and frequent failures. The reason behind the uncertainty is simple. While technical tools like moving averages, trendlines and channels can be used to forecast a long-term trend, the weakness of such tools is that they are highly subjective and their effectiveness depends heavily on the user’s experience and skills.
Furthermore, those tools are strong in describing what has happened but have limited ability to predict what is going to happen. Trying to forecast the market based on such tools produces highly uncertain results, as the nature of such patterns is highly dependant on conditions in charts of higher time intervals.
A fundamental fact of the stock market, or financial market in general, is that the market is volatile; a given trend is often accompanied by many small countermovements on the way. Many of the temporary countermovements appearing in the daily chart, however, will disappear in the monthly or the quarterly chart. This shows that the volatility associated with longer time intervals is characterized by larger countermovements. This observation, of course, is nothing new. The implication that a longer trend is associated with higher volatility is consistent with empirical observations.
It follows that the reversal of larger trends associated with a longer time interval requires countermovements of longer durations to confirm. This is required to make sure that the countermovements indeed signal the end of the original trend and the start of a new trend in the opposite direction, not just a result of volatility with the original trend still in force.
Most traders, consciously or unconsciously, use only one fixed-time interval chart, e.g. daily interval, as their main focus. In reality, relying on a single time interval chart is very limited. The independently effective range, i.e., the range where movements are not driven by factors associated with other intervals, is even more limited. On average, analyses based on, say, a one-day interval chart are effective probably no more than 20 percent of the time. For the remaining 80 percent, analyses are purely operating on chance; the direction of the market is not related to the values of the selected interval chart, but rather driven by factors that would be reflected in the values of the technical signals from charts of other time intervals.
When the market is on a temporary short-term countermovement in a lower time interval, it would display notable pauses against the short-term trend before final resumption of the longer-term trend. On the other hand, before completing the trend or pausing in longer interval data series, the market may move straight in one direction after finishing shorter time interval countertrend/waves, or only pausing for a shortened period of time before resuming the movement in the original direction.
However, it always remains an agonizing experience to decide whether a bear market has ended, or whether a rebound is only temporary. There has not been an indicator or an approach in technical analysis that can provide concrete answers to the above questions with a good degree of confidence and a sound logic to support it. The best that can be hoped is a statistical analysis that says that the indicator worked, say, 65 percent of the time in the past. Strictly following the indicators from a given interval chart, such as the daily, may result in repeated failures. For example, on a long declining trend, taking a long position on short-term pullbacks, would suffer repeatedly from the ensuing further falls.
