How much more downside is there in this market?

Share prices have been falling for a while. The short-tem and intermediate term trends are to the downside. How much lower can share prices go? Have they fallen far enough? To answer this question on has to look at the longer term charts, i.e. weekly and monthly.

While looking at the daily chart of the FTSE 100, it appears to be oversold. RSI is below 30 and stochastic is below 20. Although with have oversold signals on the chart, there are no reversal signals on it. Hence, now is not the time to buy, especially if you are buying for the short-term.

On the weekly chart we see that the FTSE 100 is approaching/sitting on support at 5500. However if we look at the indicators, RSI is around 35 and still heading down. This signifies selling is winning the battle. A look at the MACD indicator shows that the faster moving average has just crossed the slower on moving down and that the Histogram has crossed below zero. This means there is more downside.

On the monthly chart, we see a bearish candle and the Index has closed below the 50 day moving average for the first time since 2004. The left side of chart show that something similar happened in 2001. All three indicators on the monthly chart are showing sell signals.

Even though the daily chart is showing signs of the market being oversold, the weekly and monthly charts are showing that there is still some downside.

Let’s remember the indicators and charts are there to show us a picture of what is currently happening in the market, they do not provide a 100% assurance of what would happen. The unforeseen such as government intervention, central bank cash injections etc, can still happen and can cause the market to act contrary to the signals generated by the charts. Let’s also note that even if a market is in a downtrend, you can still have the occasional days or weeks where the market will go up before resuming it’s downtrend. Lastly, even when the overall market is in a downtrend, there would still be some sectors or companies that will experience and uptrend within the overall downtrend. There will also be opportunities for short-selling.

My analysis is that until there is evidence to the contrary, there is still some downside in this market, even though you need to be cautious as the index might make one more attempt to rally above the 50 day MA on the monthly chart. However there is money to be made, irrespective of whether the market is going up or down.

Identifying your weakness is a major step towards winning in the market.

“A trader, in addition to studying basic conditions, remembering market precedents and keeping in mind the psychology of the outside public as well as the limitations of his brokers, must also know himself and provide against his own weaknesses.”- Jesse Livermore.

I’d like to share my thoughts on this quote by Jesse Livermore. For those that do not know Jesse Livermore, he was on of the greatest speculators of his time. His trading career is serialised in the greatest book on trading psychology, “The Reminiscences of a Stock Operator”.

As human beings, we find it difficult to admit our weaknesses. This is one characteristic that we take into trading. A lot of traders start off by attending a course on technical analysis or buying a book to study. At the end of the course or on completion of the book, the “new trader” will know a lot about indicators, trend lines, candlesticks. They can tell you a lot about moving averages, MACD, OBV, RSI, hammers, hanging man etc. However most trading courses to not adequately address trading psychology and the emotions of greed and fear. There is a saying that goes “we have known the enemy and the enemy is us”. The two most powerful emotions, greed and fear rule supreme when it comes to trading. Most losses of missed opportunities in trading can be traced down to one of the two. It is greed that makes a trader enter too many positions, i.e. overtrade, while it is fear that makes a trader miss out on a trade that he had monitored for weeks. These emotions are very subtle and people don’t even realise that they are being driven by it. If you can identify and provide against your weakness then you are likely to win more than 50% of the time.

How much do you know about yourself and how are you addressing your weaknesses? For instance, a self-confessed alcoholic wouldn’t go into a wine or beer store just to window shop. Also, he wouldn’t hang around pubs or wine bars just to see what is happening. Leave him in the bar long enough and before you can say Jack Robinson, he is sipping his first glass of alcohol, which would lead to another and then another. Likewise, if one of your weaknesses is overtrading, then you shouldn’t be looking at intraday day charts to see what is happening in the market, whether the Dow or NASDAQ is up or when the MACD has just moved above average, etc. You might do it with good intentions, but I can guarantee that if you continue looking for 10 minutes or more, you would jump into a trade. All it takes is a click of the mouse. After you have entered the first unplanned trade, it becomes a lot easier to enter the next unplanned trade. Like someone rightly say, if you trade daily charts, you don’t need to look at intraday charts, it is dangerous and it can cause you to jump.

Patience is a virtue

Patience is a virtue

The importance of patience cannot be overemphasised when it comes to trading. A trader, experienced or amateur has to be able to wait for times when the conditions are in his favour. It’s true when people say “that the odds are against you from the start”. However, trading is a game of probabilities, and one should only move when the odds in his favour.

Here are a few quotes from experienced investors/traders

"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely." – Warren Buffet

"The most important quality for an investor is temperament, not intellect... You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." – Warren Buffet

"The Stock Market is designed to transfer money from the Active to the Patient." – Warren Buffet

“The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.” – Jesse Livermore

“Profits can be made safely only when the opportunity is available and not just because they happen to be desired or needed. ...Willingness and ability to hold funds uninvested while awaiting real opportunities is a key to success in the battle for investment survival.” - Gerald Loeb

“You make money on wall street by being very selective and being patient, waiting for those opportunities that are irresistible, where the percentages are very heavily in your favor.” - Seth Glickenhaus


If you have the privilege of speaking to a broker, one of the things that they would tell you is that the people that tend to lose the most are people who trade the most. If you overtrade, it’s only a matter of time before you go bust. If you are currently losing money in the market, ask yourself this question – “am I overtrading?” If you trade 4 time a week, maybe reduce it to 2 and see if your results are different. Overtrading doesn’t just apply to opening a position, it also applies to closing positions. According to Livermore, “The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.” Once you have done your analysis, and decided that a trade meets your criteria, if you decide to go for it you have to be able to “see it through”, unless it becomes a losing trade. That’s why it is important to have predetermined stops when you open a position. Remember the market doesn’t always move in straight lines, which means a winning trade might initially show a loss of a few points before it continues in your direction.

Happy trading