Did the recent sell-off catch you unaware?

Prior to this week’s sell-off the market had been moving within a range. However, when the Dow Jones index closed below the 800 level last week, a strong signal was given. A psychological support level was broken on the weekly charts. If you have a good look at the weekly chart, you’ll notice that even though the index had dropped below 8000 a couple of times, it always rebounded and never closed below it. The 7400 level on the daily chart is another significant level in that it represents a one year low. Statistically, if an instrument makes a new one year low it tends to continue the downward movement. If the market fails to hold this support level, there is a possibility that it would head towards the 7000 for support.

Take a look at the daily, weekly, and monthly charts.

Happy trading

Is Santa Claus Coming To Town?

The Thanksgiving and December rally happen frequently on the stock market. Even though the stock market trend this year has been a downward trend and stocks have fallen sharpen over the last few months, there was a strong rally during the Thanksgiving holiday week. Will the December rally also happen? No one can tell for sure. The saying “only death and taxes are certain” also applies to the stock market, in that it operates on probabilities and nothing is 100% certain.

Taking a close look at the daily Dow 30 index chart, one would conclude that the market is poised for an upside movement. However, because the weekly charts haven’t given an upside signal, any signals from the daily charts should be treated as short term. More evidence that there might be some upside movement is the Volatility Index (VIX). The daily VIX chart beginning to give signals of a downward movement, an indicator that the market is about to move up.

However, because we are in a bear market, we should consider any upside movement as short term or a pull back. In addition, to confirm the upside movement I would wait for Dow to take out the previous week’s high of 8827.

All the best.

The key reversal day?

On Thursday the market witnessed what is known as a “key reversal day”. An upside key reversal day occurs when the market opens below (or at) the previous day’s close, falls to take out the previous day’s low and then rebounds to close above the previous day’s high. This does not happen very often and is usually a strong signal that the market is about to reverse. A key reversal day is a signal, and the signal is not confirmed until the market (or stock) closes above the high of the key reversal day.

It also looks like the Dow is trying to find support at the 8000 level. Other markets are also trying to find support. If the markets manage to find support, then we should experience a rally, even if it is a short term one. On the other side, if the market breaks supports, i.e. closes below 8000, then there will be more downside pressure. It’s also good to note that we are heading towards the end of the year, and this is usually the time for the end-of-year rally. As you know, past performance is not necessary an indicator of future performance means the end-of-year rally is not 100% certain.

As we head towards the end of the year, it’s very likely there will be a lot of opportunities which we need to look out for. However we need to make sure that we wait for our indicators to confirm the movement and we should only act if the odds are in our favour.

All the best

Looks like there is some upside on the horizon

The markets took a massive hit during October. During the month the Dow fell by 1525 points, while the FTSE 100 fell by about 526 points, almost 11%. At one point the FTSE actually fell as low as 3750 before recovering some of the loss to close at 4377. Despite the massive selloff during October, the final week of the month produced the largest weekly rise so far this year. The FTSE 100 rose by almost 500 point, a 13% gain.

What’s next on the horizon?

The markets are currently oversold and it seems that there might be some upside movements. The daily charts are beginning to look bullish. Added to this is the fact that historically share prices tend to rise during the last 2 months of the year. The US election is also around the corner and the result of the election might have an impact on the stock market. The weekly charts are also showing some signs of recovery. The monthly charts are still showing a downward trend, so the upside movement should be considered short term, at least for now.

Take a look at the daily charts below.

All the best.

What is good for the goose is not necessarily good for the gander

I read somewhere that Ed Lampart is adding to his stake in auto parts retailer Autozone and buying shares heavily. For those who don’t know him, he is a billionaire hedge fund manager. A couple of weeks ago, Warren Buffett said in a leading US paper that it was time to buy. Does the fact that these 2 people are buying mean that it’s time for everyone to buy? In my point of view the answer is no. Don’t misunderstand what I’m trying to say. I’m not saying that these guys are wrong in their thinking. I’m not even qualified to say so as I have not made a fraction of the money they have made on the stock market. However, they have a peculiar style of investment and if you are going to follow their advice then you need to make sure that your style is similar to theirs.

Since Buffett made his announcement, the Dow index has fallen over 1000 points, some shares have fallen more than 20%. This is a big drop for a trader or investor that is only willing to hold onto a share provided it doesn’t drop more than 10 – 20 % from his entry point. This type of trade won’t be suitable for a short term investor.

You also have to think about risk management. Depending on the school of thought (or should I say risk) that you belong to, it’s been suggested that to survive as an trader (or even investor) you should not risk more than 5% of your capital on one single stock. Ed Lampart and Warren Buffett have billions at their disposal and can afford to buy shares now and hold onto them till the whole turbulence is over. They are concerned about a company’s fundamentals and won’t be moved by a 20 or 30% drop in the value of a share price. They know that share prices are heavily discounted at the moment and they are willing to hold onto the shares for as long as it takes. Just consider the following 2 quotes by Warren Buffett

“Our favourite holding period is forever.”

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.”

To round up, if you are not happy to hold onto the shares for a long time, don’t buy yet. If you are a technical analyst, wait for your charts to give you the signal. That might be tomorrow, next week or next month. Nobody know when.

Happy trading

Is the UK in a recession?

There is a lot of talk around the fact that the UK might be heading into a recession. The UK's Gross Domestic Product (GDP) which measures the output of the UK economy shrank 0.5% in the third quarter. This was a greater contraction than what economists had predicted. We still haven't had two consecutive quarters of economic contraction, so “technically” we are not yet in a recession.
However, government announcements are lagging indicators in determining whether we are in a recession or not. It is a lagging indicator in that the contraction had actually taken place before the announcement.
The stock market indexes are leading indicators when it comes to showing the health of an economy or whether an economy is in a recession. The stock market is “forward thinking” and the future health of the economy of a company is usually factored into the value. The stock market points to the fact that it is very likely we are already in a recession. However the good news is that share prices tend to rise during the second part of a recession. They fall during the months leading into a recession and the earlier part of a recession. Why do they rise during the second part of a recession? They rise because they economy would have started to expand (meaning business would be better) before the announcement is made by government.
Although I haven’t got any official figures to show how the UK stock market has performed during UK recessions, the table below shows the performance of the S&P during the last 5 US recessions.

Bear markets of the past 100 years

The table below shows the bear markets of the last 100 years. The worst so far was the September 1929 - July 1932 when the Dow lost 89%. In the current market the Dow has lost about 33% from it's recent peak at 14,000. This just illustrates that even though share prices have fallen a lot and shares are "cheap", there is still downside potential in the market.