Every so often Toddo has asked a version of the rhetorical question: do people follow technicals because they work, or do technicals work because people follow them? The Pentagon, it seems, believes people follow them because they work. At least, that's the implied message behind a story that caught my eye on this morning's New York Times. (See story here.) http://www.nytimes.com/2003/07/29/politics/29TERR.html?hp
The futures market, even more than equities, is a market that is largely driven by technical changes. First, the futures market is a much faster market than equities. Second, futures contracts allow traders to use leverage to a much greater degree than equities. The combination of speed and leverage requires traders to adapt to changes in supply and demand more aggressively than they might in the equities market where stocks do not have a finite lifespan. This rapid response often requires traders to change their posture without the luxury of delving into the underlying fundamentals that may be related to the supply/demand change. For those reasons technical analysis, in its many forms, is the tool of choice for those who are involved in trading futures contracts.
Today, the New York Times reports that the Pentagon is preparing a futures market on terrorist attacks. In this online futures market anonymous speculators will bet on the potential for terrorist attacks, assassinations and coups. According to the Times: "Traders bullish on a biological attack on Israel or bearish on the chances of a North Korean missile strike would have the opportunity to bet on the likelihood of such events on a new Internet site established by the Defense Advanced Research Projects Agency."
The Pentagon is defending the program, according to the article, because "futures trading had proven effective in predicting other events like oil prices, elections and movie ticket sales." In other words, using my spin, futures traders are following the technicals because they work.
There are so many things in this story that make me want to say "Holy Cow", I don't even know where to begin. So I'm just going to put it out there for you to read and draw your own conclusions.
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