The next US President is certainly going to have a lot on his plate. The Paulson-Bernanke plan to rescue the financial sector before things get even worse reveals the seriousness of the financial situation of the US economy. It comes as no surprise given the plummet in real estate markets, followed by the fall in the credit markets, followed by the equity markets, and then commodities, all in domino fashion. If you pull up a chart of any of the broader equity market indexes, you will see that they have been in a bear market since late 2007. Will this gigantic bailout of the financial sector really help turn the markets around?
The state of the US economy is nothing short of troublesome, and if it doesn't improve -- that is, unemployment continues to rise and home sales continue declining -- there will be room for the markets to fall even further. So until the economy stabilizes, we may not see a turnaround in the markets. Here's a question we all want to know the answer to: When will we know the markets are turning around?
In this issue of Technical Analysis of STOCKS & COMMODITIES, we have a collection of articles that will shed some light to answer that question. "My Kondratieff Wave" by Koos van der Merwe exposes us to the cyclicality of the markets and how market cycles can be used to forecast movements in the markets. It's an interesting article showing that economic forces repeat in waves and how using these waves can help you anticipate how long this bearish situation will prevail. The article starts on page 32. "The Keys To Trend-Following" by Donald W. Pendergast, which starts on page 26, discusses a simple exponential moving average (EMA) crossover system that you can apply to keep yourself in a trending sector. A similar strategy used by trader Joshua Hayes, our interview subject for this month, also follows a simple moving average strategy to determine when to be in the markets and when not to be. Hayes also tells us that to extract money from the market does not mean you have to be constantly trading. The interview starts on page 56.
So, going back to the question, when do we know the markets are turning around? The articles I mentioned will give you a pretty good idea what you should be looking for. The markets have taken a good beating, and it'll take a while to clean things up. What a way for a new President to start his term!
Originally published in the November 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.
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