There are many different methods available to traders and investors when it comes to predicting future price movements. Anyone who is trading equities or their associated derivatives will know that an integrated approach (combining technical analysis with fundamental analysis) is by far the most accurate and therefore the most desirable. Of course, there are instruments which can be traded which do not lend themselves to these techniques; things like currencies, futures and indices. When faced with these challenges, how should the trader adapt?
Well, the first thing to note is that the confirming indicators should come from other sources. This will avoid the dreaded ‘co linearity mistake’ which many novice traders make. Obviously the chart and technical indicators are the perfect place to begin your analysis, but without good fundamental information this can be a myopic view. Inter market analysis, interest rate differentials and interest rate markets can help provide the supporting evidence for a view and a position. Just looking at a chart in isolation is not best practice.
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The Dow Jones Industrial Average (INDU:CBOT in your software), shows some telltale signs that a break out might be imminent. Generally, breakouts represent the beginning of a new trend and can herald a good profit opportunity. Despite price’s current trading range; which is sideways and capped by the potential of resistance to form a double top, there are some indicators which provide an insight into underlying strength. On Balance Volume allows the trader to take an ‘unrelated view’, based upon volume (rather than price) whilst the Oscillator shows the momentum and price “acceleration”.
From an inter market perspective, some additional information can be gleaned from the fact that the equity market has outpaced the bond market in terms of relative performance. Although there are other factors at work, it is possible to rationalise that investors are presented with a choice when it comes to putting their cash to work. Government bonds offer low risk guaranteed income streams (for all intents and purposes) whereas equities offer higher risk, yet higher returns.
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The chart above would offer some evidence that this is taking effect. Again, you can see the Dow Industrial Average, but this time the lower chart is different. Here you can see the US 5 year bond (TDY-Spotv) as it stands compared to the Dow. By using the Relative Strength Comparison tool in ProfitSource or Integrated Investor, there is some substantiation to the notion that investors are shifting from bonds into equities.
When it comes to profiting from this type of set up, trend following techniques are the obvious first choice. Adjust the Elliott Wave count to 120 bars and wait for an appropriate signal, for example. More appropriate might be the Wave 3 break out trading system taught in the TradingKey, adding to positions in an efficient pyramid fashion.