OPENING POSITION
Ever since we saw the Dow hit 13,000, the true character of the markets has revealed itself. When the Dow Jones Industrial Average (DJIA) broke above this level, we saw optimism in the markets. But as is typical, those markets are constantly moving between highs and lows, in what is actually a normal, healthy reaction. When there is too fast of a runup, the right thing to happen would be a correction; otherwise, we could be in for a whirlwind decline, falling hard. If you look at a recent chart of the DJIA, you will see that most if not all of the indicators pointed to a market that was overbought. So a selloff would actually be a good thing, especially in light of shaky global economic conditions.
The problems in the eurozone may have been temporarily fixed, but right now, we’re seeing a slowdown in China as well, and this is a new cause for concern. Add to that the rising gas prices mainly due to geopolitical concerns in the Middle East and no significant improvement in the US housing market — so yes, we are still far from any real economic growth.
While it is true that the US has seen some improvement in the jobs numbers of late as well as consumer spending, there’s still a lot more that we need to see to spur economic growth. But in spite of these weak conditions, I am not going to encourage you to stay on the sidelines and wait to enter the markets until things settle down. Why do that, after all, when a market is clearly trending up?
And that is where technical analysis truly shines. If we are in a market where new highs are being made, then why miss out on money-making opportunities? Technical indicators are working so well in this market, making it very easy to identify when a market is oversold or overbought. I can’t remember the last time we saw a market like this.
But that doesn’t mean it is an easy market to trade. Quite the contrary! Don’t be surprised if these up and down movements in the market stick around for a while. The market could turn very easily, which is all the more reason you need to have solid, robust systems in place. If you have had a few winning trades in a row, perhaps it is time to take a break. The last thing you want is for your emotions to get the better of you.
Jayanthi Gopalakrishnan, Editor