Many years ago David Bowden commented that, “more often than not, the market will do just enough to mug you”. The salient point here is that many traders get so focused on what ‘must happen’, they miss what is actually happening.
As an experienced trader and instructor, I have seen trader’s opinions get in the way of actual market movements many times. Both the local and international markets are currently positioned in such a way that many traders and punters are saying they will have to fall, and fall hard. I agree that the run that has unfolded since Novemeber last year has been strong and we are now closer to a top than a bottom. No prizes for that assessment!
Of course, it is important to follow strong trends. Investors have the edge over traders in a strong, bullish market. Their views are long-term and they have no intention of exiting, so they just sit and reap long profits. Alternatively, the trader knows there must be a top sooner or later. Safety in the Market teaches trend reversal trades as a mainstay in appropriate markets and there have been some strong price and time setups in the recent weeks. Even some aggressive short entries have been triggered. But as I write (9am, Thursday, 24 January), the US markets are into fresh highs and stronger price action is on the cards for Australian markets.
So are you a neutral-minded trader, open to the potential of markets moving higher or lower? Or have you committed to a direction? If you have committed to a direction, that’s fine - you have to have an opinion to make money in trading or investing. The cautionary note is that the market is always right, so it’s better for your bottom line to agree with it than to disagree.
A simple trend test is instructive. The three swing charts below analyse the SPI 200 index in Australia and all are showing the prevailing trend - an uptrend, an uncertain trend and another uptrend respectively.
Chart 1 – SPI 200 Daily Swing Chart
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Chart 2 – SPI 200 Weekly Swing Chart
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Chart 3 – SPI 200 Monthly Swing Chart
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To me, the big picture (monthly) suggests we are, broadly speaking, in a third section. If that third section repeats the previous range, we would be drifting very close to the 5000 point area, which proved very important in 2010 and 2011, making this an important technical area to watch for resistance.
The weekly chart trend is uncertain and expanding in its ranges. A further 50 point rise from here would see the 240 previous weekly swings range double to 480, presenting another nice harmony to keep an eye on.
This is all analysis, not trading. To trade these moves, I would be keen to see a confirmation of any change of trend. I remember the run that started the big bull in 2003, when we had the same reasons for markets to head lower as we do now. Despite these reasons, the markets surged higher. And if the huge capital reserves currently on the sidelines are employed, then any technical reason for a top could be bulldozed by the weight of new money moving into the markets.
At this stage, you may be wondering whether I have become an economist or an investor. Not at all! But history and my own experience tell me it’s easier to call bottoms than tops as there’s always someone ready to throw in another dollar, especially around tops.
Therefore, in the near term, any short trades will have to be confirmed on more than just a 1-day swing chart. Look to the 2-day chart or even a weekly perspective. I would also suggest that short trades in equities in this environment should include a stop and reverse strategy.
There will be a top to drag this market down at some point in the future. With good skills and planning, I hope to be on it and I wish the same for you. In the meantime, don’t miss out on long profits if they are available until we get there.