Let's look at a human analogy to see why principles in technical analysis might work in the markets.

Mary is the happiest she has ever been in her life. She is at " high point in her life because so many good things have happened 10 her. Today she receives more good news, and decides to celebrate by throwing a party. The next day she receives some bad news. She takes the news well, treating it more as a minor inconvenience because she still feels elated about her good fortune.

Jennifer is sad and the most depressed she has ever been in her life. It seems as though there has only been bad news in the past few months. Today she receives more bad news and drops to an even lower level of despair. The next day she receives some good news. She still feels quite depressed because it is almost inconsequential, relative to the overwhelming bad news she has suffered.

These two scenarios are no different than what happens to a market when it makes new highs or lows in price. Market in a strong bull trend, similar to Mary's emotional highs. In early 1987, the stock market made a strong up move, as shown by the March 87 NYSE contract. Any bad news was met with minor sell-offs followed by continued stronger moves to new highs. The September 88 Swiss franc in a severe bear trend, similar to Jennifer's emotional lows. Any good news was met with continued selling and short-lived rallies.

Ever wonder why bad news in a bull market gets shrugged off as if it doesn't matter, and good news sends the market even higher? Or why does good news in a bear market not seem to matter much, but bad news seems to bring another vicious sell-off? These phenomena happen because the market has an internal strength or weakness just as any person has certain strengths and weaknesses. The market does not move as if everything that happened before is of no consequence. The state of the market (whether it is strong or weak), will have a great deal to do with how it reacts to the present situation.

In essence, technical analysis assumes that markets will exhibit future behavior which is consistent with the past. This behavior is reflective of a combination of many factors, and not just the immediate situation. This assumption is no different than how we expect people in act. Most people are predictable, and one can usually expect certain actions from people we are familiar with. This is because people have a basic personality that is not easily changed. In fact, when people exhibit extremely erratic and totally unpredictable behavior, unfortunately, they are often not well.