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The chart is a graphic representation of the market’s valuation of the security at a particular point in time. Each point on the chart, such as point D, Figure 1.2, captures in the traded exchange the exact market valuation of Ashton Mining. This is not a valuation of fundamental worth reached after a simple addition of its assets and the subtraction of its liabilities. This is not a simple count of the cash in the wallet or diamonds on the shelves. It is an estimate of how much shares in this company are going to be worth sometime in the future.

When the transaction takes place at D the seller believes Ashton Mining is doomed. He jumps out because he believes prices will go much lower. He takes the loss now before it gets any larger in the future.

The buyer has exactly the opposite conviction. He believes, for whatever reason, be it fundamental or technical, that the price is going to increase in the future. He is happy to get a bargain entry into an improving price. The seller is pleased because the exit saves him from further loss. Time will tell who will be happy and who will be regretful, but for this very instant each person on either side of the transaction believes he has done the best possible in his circumstances.

This understanding of market activity – of this trade – tells us nothing about the current status of the company, about its inferred resources, its management, or its audit report. Point D on the chart is never designed to give us this information. This point tells one thing only – how the market of buyers and sellers felt about the value of the security at this precise point in time in relation to its future potential. Such a valuation is a measure of market sentiment.

When we understand that the bar chart measures market sentiment by using market price, then we have a solution that allows the fundamental trader and the technical trader to make the best use of a chart with a price plot.

Price is primarily a measure of sentiment, not a measure of worth. If we do use it to measure company worth, such as when it is incorporated into a number of financial ratios including price to earnings, price to net tangible assets, or debt to equity, we still end up with a result reflecting current market sentiment rather than a balance sheet.