Use chart analysis to understand bubbles

Do we need to worry about a bubble, or is the market activity just the normal excitement in the market? After the collapse in Dubai, many people are asking this question. Some analysts are warning of a bubble in several of the world markets. A market bubble is defined in several ways, but we prefer to use chart analysis to decide if a bubble is developing.

The bubble conditions are clearly revealed on a chart of price activity. The price activity is a reflection of human behavior in the market. The way that price behaves on a price chart leads to two measures or indications of the emotional behavior of the market. These give us a warning of when a bubble is being created. They also show the difference between the normal enthusiasm and excitement of the crowd and an excess of excitement, which leads to a bubble.

Chart analysis is used to understand the behavior of people in the market. Technical analysis is used to understand the behavior of the two most powerful groups of the market. When people act in small groups their behavior is different from when they act in large groups.