Physics Need Not Apply
The stock market does not operate in accordance with the laws of physics. Rather, it is a continuous response to the ever-changing psychology of the investing public. Here’s an example of the difference between purchasing a car, on the one hand, and 100 shares of stock, on the other: If the asking price of a new car increases, demand falls off, does it not? There is a resistance to higher prices. However, as the price of a share of stock increases, demand increases! People see the price going up, and then want to get aboard the bandwagon because they believe that prices will go higher still. Why is there a difference in human response? Because the financial world operates under rules that are different from those of the physical world. This is a fascinating study. Stock market analysis involves, at root, a study of human psychology. It is the sentiment of the mass of investors at any given time which determines the course of the stock market. It is the job of the technical analyst to ferret out clues to this psychology of the masses and, from that study, to estimate the probabilities regarding the future course of market prices.