Instruments are not there to predict the future, but to tell you where you are now.
PER · PBR · RSI · MACDAn aircraft has an altimeter, airspeed indicator, heading indicator, and fuel gauge. A pilot never flies by watching only one instrument. Markets are the same.
PER, PBR, RSI, and MACD each observe something different. Start by asking what each instrument is designed to measure.
How highly the market values the share price relative to earnings.
How highly the market values the share price relative to net assets.
The strength of recent price moves. Think of it as an engine temperature gauge.
Checks whether the trend or momentum is changing.
Do not simply decide that a PER of 10 is cheap and 30 is expensive. A high PER may reflect strong expectations for growth, while a low PER may reflect concern about future earnings declines.
Think of it as asking: “What price is the market assigning to the aircraft itself?”
RSI measures the balance of upward and downward price strength over a given period. It is generally displayed on a scale from 0 to 100.
Even above 70, RSI does not mean the price must fall immediately. In a strong uptrend, RSI can remain elevated for some time.
Before worrying about the detailed formula, understand MACD as an instrument for observing changes in price trend and momentum.
It helps you observe whether upward momentum is strengthening or weakening, and whether signs of a change in direction are appearing.
This is the most important idea in Chapter 6.
When several instruments point in the same direction, the picture changes.
That leads to a different hypothesis: “Altitude is still high, but perhaps the engine is beginning to lose some thrust.”
| Instrument | Question |
|---|---|
| PER | What expectations are priced in relative to earnings? |
| PBR | How is the market valuing the company’s net assets — its aircraft value? |
| RSI | Is the engine running too hot right now? |
| MACD | Is there a change in direction or momentum? |
| Volume, VWAP, price change, etc. | Are the other instruments showing the same picture? |
Do not memorize numbers. Learn to see the picture behind them.
You have checked the cockpit instruments — altitude, speed, and engine condition. But no matter how well the aircraft is performing, a huge cumulonimbus cloud ahead can change the flight plan.
Market weather: News, economic indicators, earnings reports, and central-bank announcements.
In the next Chapter, we will look at the market’s “weather information.”
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