Evening traders/investors,
Along with mainstream media, I have been waiting for a good-sized correction in equities for quite a while already. In the same period, the market gave us small corrections but subsequent rallies left me bringing my eyebrows together. On the fundamental side, not much bad news from the States is always a good thing. The recent Cyprus scare got me ready to pull the trigger on risk-off set-ups, but it did not turn out to be much in the end. (What surprised me was the greenback inching up along with equities). Another piece of news messing with my mind is the war rhetoric and dangerous games played in that region of Northeast Asia. It is debatable whether such non-financial factors are priced into the market quickly or not, which presents a kind of wildcard for chartists. I try to be as true to certain pioneering chartists when they say that every kind of factor will be priced into the market even before confirmation of the factor. Some will say it is ridiculous for the market to know if war will emerge or when the next tsunami hits a developed country.
Feeling a little lost the past week or so, I decided to go back to the charts and rely on them as I have for so long. The media will turn from bull to bear to bull so fast you do not even know what hit you. That is why I do not trade on news and make Bloomberg my best friend on weekdays. The news messes up with your trading methodology, and even worse for those whose systems are based on the news itself. Tried and tested analysis is there to give you an edge, and money management is there to save you when you are wrong.
In the chart of the S&P 500 above, it is ever so clear that the trend for whatever time frame you look at is up. The significance of the last 7 to 10 trading days is that US indices have breached major highs (all-time highs in some), and look set to stay above those levels. Indicators giving bearish divergences have run their course already, so I deem them as done and passed – this happens when a market reverses (makes a correction or consolidation), and the indicator drops clearly to “neutral” levels. So even though the market does not nosedive, it has made a small correction, and the previously bearish divergence has run its course, and the chartist should drop it from the chart.
I do not have any patterns to work with for now, so I do not have specific set-ups for indices. But, I am pressured to jump into equities if the bull is in the house. In a bull market, prices just keep rising. It does so in a silent way, without much fanfare from the media - unlike quick, sudden declines. As a trend-follower, I cannot keep waiting for the sake of being a contrarian.
The paradox here is this: if you think hard about it, every single day or week that the market advances brings it closer and closer to the period of consolidation or correction. So, even if you know the longer-term trend is up, it will be foolish to jump in so quickly because you know a better opportunity will come. However, we have no crystal-ball, and there is always the fear of a runaway train. Need an example? Look at USDJPY. Or, there are always ”normal” mid-term equity rallies to refer to. (The 3-month run-up at the start of 2012 is an example. Look at the chart above).
I do not think this post left you any biasness on which side to favour for the days ahead! But, what I am trying to say is that while I am still waiting for a correction – I do not think it is irrational of me because my money management system tells me to avoid the market – I have no choice but to respect the trend in indices, and look at other instruments to trade.
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