A flattening trendline as a critique of the fundamental overlay

Two ways of naming the next push

Long-term advances and declines are treated as products of economic fundamentals. Forecast-based and price-based analysts are both trying to identify the next direction those fundamentals will push price.

A fundamental-overlay is a regime check that asks whether the currently dominant economic or policy force still matches the sign and strength of the price trend.

The forecast-bottleneck

A core technical critique is that many fundamental variables can move a market, so it is not consistently possible to name in advance which variable will dominate next.

A second technical critique is that even a correctly singled-out variable is hard to project. Expert views on inflation or money-supply growth often point in opposite directions.

Together those two limits are the forecast-bottleneck: the paired difficulty of naming which variable will dominate next and then projecting that variable's path.

In 1993 a consensus near 3 percent growth and a higher 30-year yield near 7.49 percent coexisted with actual growth of 3.1 percent and a year-end 30-year yield of 6.30 percent. Tax and long-bond issuance shifts overtook growth as the market's focus.

Reading sign and fade from the path

Trend-following is one testable procedure that stays with price direction until the rate of change says the driving force is fading. It assumes participants absorb the dominant force, and that price direction plus its changing speed reveal that force's sign and whether it is strengthening or fading.

A dominant-force-audit reads a force's sign from price direction and its persistence from whether price is changing by more or less over time. The instrument for that reading is a trendline: a line through the body of an advance or decline used to judge whether the path is steepening or flattening.

A steepening advance is read as a strengthening positive force and is followed. A still-rising but flattening path is read as a weakening positive force, which conservative trend-followers hold without adding and aggressive traders may fade.

A steepening decline is treated as a strengthening negative force to follow, while a slowing decline is treated as a weakening negative force that aggressive traders may buy against.

When a paused advance restarts

On a Treasury-bond futures chart, a centerline through price showed a fading rate of ascent in March and April. After the uptrend resumed in early May, covering plus new and add-on buying produced a six-point rise in the first half of May.

That pile-up of short covering, sidelined entries, and trend-following adds when a paused advance restarts is the resumption-crowd.

Price-trend readings and fundamental-overlay readings often agree. When both camps act in the same direction the resulting price move is described as typically large.