V.2:5 (151-157): COBWEB DYNAMICS: Microeconomic Basis for Technical Stock Market Analysis by Kent Kachigan

COBWEB DYNAMICS: Microeconomic Basis for Technical Stock Market Analysis by Kent Kachigan

Introduction

For many years, investors, analysts and economists have been debating whether the theories developed by technical stock market analysts have their foundations in traditional microeconomic theory. While many technical stock market analysts intuitively believe that their theories are associated with supply and demand, they have not yet been able to demonstrate this connection. I present an idea demonstrating the link between microeconomic theories and technical stock market analysis in hope that this will allow these now opposing views to combine their efforts, so that investors, analysts, and economists can increase their understanding of price fluctuations.

My objective is threefold: to justify and explain the economic basis of technical stock market analysis, to identify and understand the implications of shifting supply and demand curves, and to understand the effects of the slope relationship between the supply and demand curves on the pattern of price fluctuations. To achieve these objectives, a theoretical economic process will be defined and demonstrated, using supply and demand curves with cobweb dynamics. The price fluctuations generated by each cobweb dynamic process will then be graphed against time. Next, the technical stock market pattern that approximates the price fluctuations generated by the individual cobweb will be determined and defined. The common properties between each cobweb dynamic process and a major technical stock market pattern will be shown. These common properties support the proposition that cobweb dynamic processes form the microeconomic basis for technical stock market analysis. After the theoretical basis has been demonstrated, a return to the supply and demand curves will allow us to reinterpret the technical buy and sell signals defined by the technical analysts.