For a while, we have been saying that the equity markets have been reeling out of control for some reason. As long as we were making money, though, nothing really mattered. It’s only a matter of time before we see a major selloff either as a correction or a reversal. The markets have to correct. On May 23, 2011, when the Dow Jones Industrial Average dropped 130.78 points, it set off all the alarms and the media was on top of it. Could this be the start of a reversal in the market? Had the market reached its top?
Along with that dip in the equity markets, the price of gold, which had declined about 10% after its impressive rally, appeared to be bouncing off its support level. Crude oil also pulled back, with prices coming close to the low end of its trading range. And with the weakness in the euro zone, the US dollar actually started showing signs of recovery.
Does this mean we will see the correction the market really needs? There is no right answer to this question, but this is a good time to keep an eye on your trusted indicators and watch how prices move with respect to their support levels or Bollinger bands or channel lines or whatever it is you look at. Even if you don’t have any open positions, it’s a good educational experience. It’s a great way to understand the behavior of the markets and to see if the indicators or strategies you use work the way you want them to.
A money flow indicator is always good to include in your trading toolbox. S&C contributor Markos Katsanos has done an extensive study on different money flow indicators and tried to identify those that show the best results. Find out which ones made the cut in his article, “Comparing Seven Money Flow Indicators.” You can also try to use some of the subordinate indicators mentioned in Martha Stokes’ article, “More Power To The Subordinates.” Using the subordinate indicators can help you identify turning points in the market much earlier than if you were using the primary ones.
It goes without saying that when most people expect the market to reverse, it probably won’t. It’ll only do so when nobody expects it to. The best thing you can do is follow your trusted set of indicators.
Jayanthi Gopalakrishnan, Editor