OPENING POSITION
June 2003
With Gulf War II behind us, can we expect to see a recovery in the markets? That's where the real test lies. So far, there have been no signs of an economic rebound. Consumer confidence is still weak, there's been no upturn in business investments, and another factor leaves room for some pessimism: The housing boom shows that the US economy is being fueled by credit. In a recent speech, President George W. Bush stated that with the war out of the way, we can now focus on economic growth. His solution is a $726 billion tax cut he hopes to pass through Congress. The tax cut may bring recovery in the short term, but whether it will help the economy in the long term remains to be seen - especially with the size of the deficit. But with the reappointment of chairman Alan Greenspan to the Federal Reserve Board, I am confident we will see modest growth. Still, it takes time - often a few months - to feel the effects of a shift in monetary policy.
As market technicians, we want to focus on the current markets. The immediate post-war effect on the market may not have been the quick rally that many expected, but we have seen a downtrending market transform into a trading-range market. With this switch the market takes on a different character, and for some of you that means using different strategies and trading techniques. A market that is in a trading range goes through a lot of up and down movement, providing plenty of trading opportunities.
There are various methods you can apply to a market in a trading range. One strategy is discussed in the STOCKS & COMMODITIES feature this month, Scott Castleman's article "Using Implied Volatility And Volume," which starts on page 32. Castleman explains that by combining these two indicators, you can use current information to better identify the direction of the market. In our interview this issue, Price Headley of BigTrends.com discusses how to use the volatility index (VIX) in identifying market tops and bottoms, along with various other options strategies you can use on a market in a trading range. The probability of the market moving against you may be high, and this is where trading options can be to your benefit, since they can be used as hedging instruments.
Here's to smart trading!
Jayanthi Gopalakrishnan,
Editor
Originally published in the June 2003 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2003, Technical Analysis, Inc.
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