Opening Position

April 2005


They go up, they go down, they go sideways ... there's no doubt about it: The markets have a mind of their own. We're well into the first quarter of 2005, and we have seen the market go through all these movements. In the early part of January they moved sideways, then fell, and then rose till the first half of February. Even the US dollar started showing signs of strength, at least until the South Korean central bank said it wanted to diversify its foreign exchange reserves. That sent the markets plunging, and we saw the Standard & Poor's 500 and the Dow Jones Industrial Average (DJIA) fall below their 50-day moving averages. The following day, after the South Koreans stated that their diversification strategy didn't mean they were going to sell their US dollars, the markets showed a little renewed optimism, although they didn't rise to the levels prior to the plummet.

At the close of the trading day, it appeared that the 50-day moving average was acting as a resistance level. I also noticed the formation of something that could be a double-top formation in both the DJIA and the S&P 500. Is that an indication that the markets could fall lower - I don't mean too much lower - to the levels they saw in the latter part of 2004? It certainly is a possibility, but then again they could soar to levels that have never before been reached. We just don't know.

Chart patterns occur frequently in price charts, and although they don't provide a definite answer to which way prices will move, they can help indicate how far prices could go after a pattern is formed. As those of us who have relied on chart patterns know only too well, there always is the possibility of a pattern failure. So is there a reliable method of measuring these price targets?

The Stocks & Commodities feature article this month, "Measuring Flags And Pennants" by Markos Katsanos, brings you a method that can be used with a relatively high degree of reliability. The article starts on page 22. Then, of course, you can combine chart patterns with indicators such as moving averages to get trading signals with a higher confidence level.

With that in mind, we have included two articles on moving averages: "Weight+Volume+Move-Adjusted Moving Average: It's WEVOMO!" by Stephan Bisse (page 32) and "Trading Moving Average Pullbacks" by Steve Palmquist (page 16). The techniques discussed in these articles will help reduce your risk when making those entries and exits.

And with the markets acting the way they have been - sharp moves in one direction followed by sharp moves in the opposite direction - it's not a bad idea to look for low-risk entries. This year should prove to be an interesting one. Let's sit back and see how it goes.
 
 
 

Jayanthi Gopalakrishnan,
Editor


Originally published in the April 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.



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