November/December 2002
To understand market movements now and in the future, learn from the past—and what better way to do that than through myths (even these made-up ones).
By Matt Levine
“Why is copper up today?” asked Bill, one of my customers.
“Zeus,” I said.
“Huh?” Bill replied, perplexed.
“That’s right—Zeus,” I repeated. “When Zeus is in a good mood, he instructs Cuprecia, the goddess of earth, to make copper go up. When he’s in a bad mood, copper goes down. Remember last Wednesday when copper fell 2 cents? Well, the night before, Zeus had bad fish. Make sense? Bill? Bill? Are you there?”
No Bill—he’d hung up long ago.
Obviously, he didn’t buy my mythological theory, but what was I supposed to tell him? That buyers were stronger than sellers? That’s all I could say for sure. But why were there more buyers? To answer that, you’d have to know the motivation of all the buyers—hedgers, position traders, options traders, scalpers (short-term traders), spreaders, commercial users, speculators, commodity or stock funds, and so on. Clearly, there’s no way to know the motivation of these diverse buyers because they all buy for different reasons. A hedger, for example, might buy a futures contract to cover a physical sale at the same time that a fund buys based on a trading signal from a computer program.
Of course, a reporter would identify at least one reason—probably a fundamental one—why the market went higher. A drop in inventories or a positive government report, for instance, could explain copper’s price rise. The truth, though, is that the reporter has no clue what really motivated the buying trend, so he or she guesses, at best offering only a piece of the answer.
You can guess too. One good guess would be that I don’t put much faith in fundamental analysis (in part because it often puts me to sleep).
I just can’t see, for instance, how data on copper usage in Europe can be accurate. There are simply too many variables for the numbers to be precise. Is someone running around Europe with a scale? Then that flawed data is analyzed with other flawed data to create one seriously questionable statistical picture. The fact that most of the information comes from a government entity only casts more doubt on its credibility. After all, who do government analysts have to answer to if the numbers are off by a few thousand tons? Perhaps the more important question is: How can anyone base a trading decision on such potentially flawed figures?
I prefer technical analysis, an empirical method of market analysis based on real, historical price information—information that can lend perspective to the market’s movements and help you understand what’s happening to prices now.
There are many approaches to technical analysis, including (this is a shortened list) moving averages, candlesticks, line charts, bar charts, daily charts, monthly charts, point and figure charts, stochastics, Gann cycles, Fibonacci retracements, Kondratieff waves, Bollinger bands, ATR, ADX, RSI, CSI (oops, that’s a TV show).
If these numerical measures and their confusing acronyms seem daunting, remember the rationale for technical analysis. Analysts use technicals because certain market conditions repeat, with current patterns often mimicking those in the past. So perhaps we should examine the past to help predict the future.
Here, I ask for help from Zeus. Borrowing from ancient mythology, which I twist and turn to my benefit (and with apologies to Edith Hamilton), I’ll attempt to make sense of some of the basic struggles between buyers and sellers. Just as the “real” myths addressed basic life questions and made sense of confusing issues, perhaps my fabricated myths will illuminate some market truths.
Cranius's Stand
The great Detritus, god of junk, sent the warrior Cranius to fight Oshacles, a monster with the top half of a lion and the bottom half of a man. Cranius arrived at the arena with armor and a small knife. Oshacles had easily beaten men equipped with much more. Soon after the battle began, Oshacles backed Cranius against the wall, attacking aggressively. Cranius absorbed the blows, using a defense subsequently called “wall-a-stall” (a technique rediscovered thousands of years later by a boxer). When Oshacles tired, Cranius attacked, easily besting the monster.
Lesson: Market bottoms are formed when waves of selling are exhausted.
Technical Analysis: If the blows of Oshacles were sell orders, Cranius absorbed (or bought) the waves of selling. When the selling was complete (or exhausted), new buy orders would find few sellers and prices would increase until more sellers could be found (when Oshacles regained his strength).
The Steps of Forclipht
Humans occasionally impressed the gods though deed, errand, or amusement. One tale tells of the gods’ interest in the accomplishments of a human named Tractor Traylaur. As Traylaur performed service after service, he was allowed to get closer to Olympus by climbing one stair of the Steps of Forclipht, a gateway from earth to the house of the gods. After years of heroic effort, Traylaur stood just a few steps away from the top of the staircase. But his deeds did not grow in stature, so the gods pushed him back to earth. The fall, which negated years of effort, took but a few minutes.
Lesson: Most of the time, prices fall much faster than they rise.
Technical Analysis: Like walking up a staircase, each step takes effort, but a fall is quick and probably will carry the fallen market well down the stairs in price before it stops. The market may end below where the “stair-climb” started.
The Battle for Residusa Hill
Ares, the god of war, amused himself by sending two armies—the Shreddions and the Epatheans—across the River Styx to fight through eternity for possession of Residusa Hill. With one army atop the hill, the other army attacked in waves until the resistance was overcome. Once the army atop the hill was pushed off the crest, the new victor had no problem pushing the loser down the hill quickly. The new victors would pursue the beaten troops until their own defenses thinned. The loser would then regroup, and the battle would swing the other way. Again and again, the armies took turns battling up the hill, with the challenger becoming the victor until the loser regrouped.
Lesson: The push and shove of the buyers and sellers is like a battle for a hill.
Technical Analysis: Bulls may attack the bears, finding peak resistance at “the top of the hill.” At that point, the battle will favor the bulls, and the bears will be easily pushed away. Eventually, though, the bears will attack the bulls’ strength and push the bulls off the hill again.
Winerus and the Isrians
In the city of Isis, armies were on the alert for an attack by the neighboring Isrians. They knew the attack would come, and their guards were ready and amassed in superior numbers. But the Isrians’ leader, Wienerus, was wise and studied the habits of the Isisites. When the sun was overhead, she noticed a silver-colored wagon loaded with food stopped at the border. The Isisite guards left their posts, took food, and sat in the shade. Guards from the night shift didn’t start until after dinner. So, halfway through the lunch one day, she led a small group of Isrians to the border, attacked, and easily overcame the Isis defenses.
Lesson: Even though a test of market support is expected, a small amount of selling can push the price of a market dramatically lower.
Technical Analysis: Look for light trading volume, usually seen during holiday trading, lunchtime, or late on Friday afternoons, for potentially larger moves.
The God Wannabe
Gods are gods and men are men, but once in a generation a mortal believes himself a god. Such was the case with Hamanaculus. Every day, he made his way to Olympus to sit at the table of the gods. People began following Hamanaculus on his daily trek to the mountain, their number growing steadily along with their belief that he was immortal. Shopkeepers gave him gifts, and men bowed to him. But a few months are but a moment to a true immortal, and the gods soon grew tired of Hamanaculus. He was cast down from Olympus, suffering shame and dishonor with all mortals.
Lesson: No man is bigger than the market.
Technical Analysis: In the short term, a big market player will look like a god (and will certainly be treated like one by his brokers). He can move the market with his large orders, but he has credit limits while the market is infinite.
Sosume's Doublecross
The gods desired to cast fury on their mortal subjects in the country of Rollofftus, but they needed justification. The gods enlisted the help of Sosueme, a wily mortal. Sosueme soon arrived in Rollofftus and convinced many of its citizens to disregard the gods’ rules, claiming that the gods had dropped their demand for obedience. Once the humans had broken the rules, the gods had the justification they wanted and severely punished the humans.
Lesson: The market may be ready to move, but a large move needs fuel.
Technical Analysis: The fuel for a move up is the short-position holders in the market. A move higher would “punish” those shorts. They’d be forced to buy to stem their losses. This would push the market price higher than new bulls could from their own buying.
The Cliffs of Dozer
Artemis, the goddess of the moon, pushed great tides to the shores of Dozer, covering the deadly rocks at the foot of the cliffs. Bubla, a young mortal, jumped blindly over the cliff, expecting death but instead landing safely in the water. The surprised Bubla related his experience to the citizens of Dozer. One by one, then in small groups, people journeyed to the cliffs to make the same leap. Finally, a huge mob trekked to the cliff, trampling those who stood in its way. As the mob reached the cliff, Artemis called back the tides, once again exposing the rocks below. The mob jumped en masse and perished.
Lesson: Beware the herd.
Technical Analysis: When the masses “jump” into the markets, it’s probably too late—but don’t underestimate their enthusiasm. The “rocks” may not be exposed for some time, and you might get trampled betting against the masses.
Poseidon Treats Zeus toDinner
Poseidon, Zeus’s brother, fell in love with one of Zeus’s mistresses, the beautiful Balera. To outflank Zeus in his love quest, Poseidon invited Zeus to dine with him. Poseidon wanted to distract Zeus so he could woo Balera, and he planned well. His plan involved serving Zeus a glorious meal, with the exception of the main course—which consisted of spoiled fish. Zeus ate heartily and finished his meal, including the entrée. Though immortal, Zeus was no match for the bad fish. Over and over he vomited until most of the illness left him. Finally, with one last great purge, he expelled the rest of the foul matter and only then started to recover (in the process bading copper to drop 2 cents).
Lesson: Markets sometimes need a final washout to new lows before recovery.
Technical Analysis: Markets sometimes need one last push where the last longs (or shorts) finally give up before they turn.
There you have it, your very own mythological guide to help you understand the market’s movements. If prices are at extreme highs or lows, see if the lessons of this market mythology offer any pattern or sense of sanity. Perhaps a market bottom will display the tendencies of Zeus and his sick stomach. Or maybe the trend will fit the pattern of Cranius and his defense against the attack of Oshacles. The point is to look at the market’s behavior, just see how it’s acting without looking for a fundamental explanation or chart point.
Of course, listen with skepticism as the trading day is described by reporters or analysts. We’re the ones who have to make decisions based on the future, not excuses for the actions of the past. Still, the past can be our supreme teacher—as reflected in the lessons and wisdom to be culled from myths (real or fabricated ones).
However you try to understand the market, please take this one final precaution: Don’t do anything to upset Zeus! •
Matt Levine, a copper and brass broker as well as a specialist in risk management and options trading, is vice president of Leonard Levine Metals Corp. (Highland Park, Ill.). He owns a seat on Comex, has been a member of the Chicago Mercantile Exchange since 1984, and is a past member of the Chicago Board of Trade.
To understand market movements now and in the future, learn from the past—and what better way to do that than through myths (even these made-up ones).