Market Manifesto

Let’s talk about over­shoot­ing, of the ten­den­cy of things to move too far in one direc­tion, and then retrace.

We are of course espe­cial­ly inter­est­ed in the dynam­ics of the crowd that over­shoots. But the fact of over­shoot­ing is a com­mon occur­rence in many dif­fer­ent kinds of sit­u­a­tions.

In the mar­ket we see many vari­a­tions of the over­shoot­ing phe­nom­e­na. How­ev­er, they main­ly boil down to two dif­fer­ent sorts: exhausts and a nor­mal loss of momen­tum.

An exhaust is a clear form of over­shoot­ing, and even a trend that grad­u­al­ly los­es momen­tum and moves into a con­ges­tion with­out an exhaust is a form of over­shoot­ing.

Over­shoot­ing occurs when a move­ment pro­ceeds past the point where its own ener­gy can sus­tain it, and the move­ment returns to more famil­iar ground. It is as if the mar­ket is say­ing “that’s was too much too fast, let’s reassess the sit­u­a­tion” and see what comes next.
In the rest of life out­side of the mar­kets, we often see over­shoot­ing and a result­ing retrace­ment. It is com­mon when­ev­er we see nat­ur­al process­es that are sub­ject to nor­mal vari­a­tions along the lines of a sta­tis­ti­cal bell curve.

We have talked in ear­li­er chap­ters about how dur­ing new ter­ri­to­r­i­al explo­rations there is often a thrust that estab­lish­es the out­side lim­it, then a retrace­ment as the new area is explored in detail. And we talked about how the vari­a­tions of many phe­nom­e­na can be described accord­ing to how they fall in with­in the sta­tis­ti­cal device of the bell-shaped curve.

Over­shoot­ing in the mar­kets can be looked at in the same way. Take the dri­ve to a new high or a new low in a trend run, which then forms a dot­ted line at the point of the high­est high or low­est low and turns and moves into con­ges­tion. This can be seen as price over­shoot­ing the area where it will even­tu­al­ly spend most of its time dur­ing con­ges­tion.

Sim­i­lar­ly we all have expe­ri­enced high lev­els emo­tion­al excite­ment, either pos­i­tive in the form of eupho­ria or neg­a­tive in the form of depres­sion, that rep­re­sent an over­shoot­ing of our even­tu­al more sta­ble state. We may remain more elat­ed than “normal,” or more sad than “normal,” but often there is that first flush of emo­tion that sets the out­er bound­ary of what we are expe­ri­enc­ing dur­ing that par­tic­u­lar time peri­od. We could call this an “overshooting” of an emo­tion­al state.

The clas­sic sym­bol of over­shoot­ing is a pen­du­lum, of course. We see the prin­ci­ple in a swing, or on one of those hor­ren­dous amuse­ment park rides.

Over­shoot­ing implies mass and momen­tum, and it is true that the larg­er and more sub­stan­tive the body in motion, the hard­er it is to stop and the greater the poten­tial for over­shoot­ing.

We know that crowds over­shoot. There are spe­cial dynam­ics that the crowd man­i­fests as it over­shoots. We fre­quent­ly see the crowd over­shoot; we wit­ness this in the sud­den shifts in pub­lic opin­ion. The crowd goes too far and then comes back and goes the oth­er way.

What is hap­pen­ing with­in the crowd?

It is not hard to under­stand. The crowd con­sists of many indi­vid­u­als, each with a dif­fer­ent tol­er­ance to change and to risk. When a new move devel­op, it has few adher­ents. As the move pro­gress­es, more and more indi­vid­u­als join the mass and move price towards new lev­els. As the move becomes obvi­ous it picks up speed and more and more peo­ple join the parade. At some point the sup­ply of new buy­ers in an uptrend dis­ap­pears and prices col­lapse, either rapid­ly in the case of an exhaust or more slow­ly in a nor­mal momen­tum shift.

Or to look at it a lit­tle dif­fer­ent­ly .… The crowd is in control…. the move is def­i­nite and sweeps all before it. How­ev­er the crowd starts to lose con­trol, starts to doubt its ener­gy, and slows, or con­tin­ues into an exhaust, where the ener­gy is total­ly expend­ed and then the crowd col­laps­es upon itself. In an exhaust the retrace­ment is imme­di­ate and sud­den and defin­i­tive and usu­al­ly larg­er in extent than an end­ing that comes as part of the nor­mal shift in momen­tum.

The point is, over­shoot­ing is a nat­ur­al process and as such, it is inevitable. Because we live inside human soci­ety we can be sus­cep­ti­ble to mass hys­te­ria and group-think and be influ­enced by the flow, ener­gy, and pow­er of the crowd. Some traders like to live with­in the crowd. Some traders like to stand apart from the crowd. But what­ev­er our ori­en­ta­tion we hope to remem­ber that a counter-move is as nat­ur­al and inevitable as the move itself.

A retrace­ment or counter-move is the most nat­ur­al thing in the world, and just because it feels like it will nev­er hap­pen, that is no rea­son why it will not. The sub­jec­tive feel­ings inside the crowd are among the least reli­able meth­ods of judg­ing how close to an end we are, and how ready to retrace.

Over­shoot­ing is hard to mea­sure from with­in; we need to step into anoth­er dimen­sion to see it clear­ly. That is why we look for time peri­od con­text-set­ting devices like high­er time-peri­od sup­port and resis­tance tools, and why we spend do much effort in tar­get-set­ting and oth­er dis­cus­sions of ener­gy ter­mi­na­tion. We find it use­ful to have objec­tive tools that help us peer through and beyond the mass hyp­no­sis of crowd behav­ior.

Why is over­shoot­ing impor­tant?

Because when we under­stand it and expect it, we can become much bet­ter traders. It is impor­tant because with this under­stand­ing, you have an idea before hand, about whether and where there will be con­ges­tion action, and the area where con­ges­tion exit is like­ly to occur, as the block area devel­ops. When we under­stand over­shoot­ing, we have a much more sophis­ti­cat­ed view of tar­gets, and can take bet­ter advan­tage of thee repeat­ing mar­ket pat­terns .