Digital Diatribes

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A Closer Look At the HadCrut 60-Month Trends

Posted by The Diatribe Guy on August 1, 2008

I first presented the above chart in my July 2008 Update on Global Temperature – Additional HadCrut Analysis post. I’d like to take a little closer look at it and ponder the implications of looking at it from a purely technical chart analysis point of view.

It’s important to see the entire chart above, but let’s take a closer look at what has happened to the far right of the chart, during the current trend period.  To get a better look at that, I started the chart at 1945 and added a couple lines for a visual:

Let me digress for a moment and discuss technical chart analysis.  It is a concept used by many traders in the stock and commodities markets.   I have utilized the concept myself in options markets.   I won’t go into great detail, because for our purposes here a general overview will suffice.

There is a theory of perfectly efficient markets where traders believe that ALL available information is already considered in the evaluation of a stock’s price.  Thousands of people every day are scouring the papers, watching the economy, looking at trends, watching company management, and so on and so forth.  This creates a situation where all new information is almost immediately processed and a determination is made as to the impact of earnings, dividends, etc.   A price is established, and other than the inherent discount given for risk/reward, nobody investing in a stock/commodity has an informational advantage.   People who adhere to this idea believe the markets strictly follow a random walk on a general path upward according to the return given due to the risk/reward nature of the stock.  The risk is usually considered based on stock volatility measures.

Then there are a group of traders who basically say “that’s all well and good, and it makes sense, but there are other factors that simply don’t figure into price.”   Those factors are intangible ideas of collective market psyche, profit-taking, and other human factors that are not strictly valuation based.  These traders take a look at historical charts and attempt to identify patterns in the charts that indicate a strong move in one direction or another.   If the chart above were a stock, for example, the trader would consider the red line under the successive troughs a support level.   In other words, when prices swing down, they tend to swing back up before crossing that red line.  The technical trader would watch a falling price, and at the sight of a reversal just before it hit the line, he would assume that the pattern is holding and it’s a good time to buy on the upswing.  Alternatively, if the trader sees a break through a support level, the inclination is to sell or go short, because it may indicate a strong move in the opposite direction now that the support has given way.  There are many other patterns in the charts that traders look for, but that works for now.  I’m not here to argue the merits of that approach, just to present it for understanding.

So, why am I discussing this?   Because I think there’s an interesting parallel in the slope patterns.   While the temperature doesn’t break out of patterns due to human psyche, it does seem to have certain breaks from the norm due to all factors combined, seen and unseen.   So, while a certain pattern seems to hold for a while (increasing support points according to some line), there are times where that trend breaks down and something seems to change. Read the rest of this entry »

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