Forum Archive Index - June 2001

[Phaedrus <Phaedrus@techemail.com>]

Silverfox,
           You ask "Would the trendline be an indication of the value given to 
a share if it operated in a truly efficient market (ie. that all information 
about the share is reflected in its price)? So, for a constant 'up-slope', the 
company has a steady rate of growth in its intrinsic value. Any change in slope 
indicates a fundamental change in the value of the company's future prospects, 
and the oscillations around the trendline are the short-term 
market doing its thing."
 You have been reading the same book as Jeremy! The Random Walk Theory holds 
that prices are serially independent, and that price history is not a reliable 
indicator of future price direction - all price movement is random, and 
therefore unpredictable. The theory is based on the Efficient Market 
hypothesis, which holds that prices fluctuate randomly about their intrinsic 
value, and that it is impossible to beat the market, thus buying and holding is 
the best strategy. I reject all of these premises. Random Walk Theory is an 
interesting academic concept that simply does not stand up in the real world. 
You would have a tough time trying to convince me that there are no trends in 
the TLS chart! So, to your question. For the answer to be yes, you correctly 
surmise that the intrinsic value would have to be rapidly rising. Estimation of 
Intrinsic Value is not my forte. We need to ask a really competent fundamental 
analyst such as Snoopy for these numbers. I would trust his calculations. We 
need to know the calculated intrinsic values for TLS at :-  
  1.  Listing  (Market at low $3.20)
  2.  15 months later (Market at high $9.20)
  3.  The present time (Market at $5.40)
If you held a gun to my head, I would put all 3 at about $8.25, but I really 
don't know.
 "Is an acceptance of efficient market theory a hidden requisite of technical 
analysis?"   Quite the reverse. The theory is rejected. 
 "Have you come across many shares that have a large curvature in one direction 
or the other over a long period such that a straight trendline differs 
significantly from the curve except for where it bisects at the beginning and 
end? If so, how is that dealt with?" I had a quick scan through about 300 5yr 
charts and could not come up with any clear examples of either. This lead me to 
formulate the Phaedrus Principle, which states 'When share prices trend, they 
tend to do so in a linear manner' This principle could help explain why 
trendines work so well.  
  If a chart did happen to give a "concave" longterm pattern, each trendline, 
drawn between 2 swing lows, would head off  into space, as the price action 
curved away from it. Thus you would get a series of short trendlines that were 
never validated (confirmed or "respected" by price movement)  If a chart gave a 
longterm "convex" pattern, again you would get a series of short, unconfirmed 
trendlines, because each one would be violated by the price action crossing 
below it as the pattern curved over. 
                       Phaedrus.

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