Opening Position
December 2006
Typically, markets correct during the September-October period, but this year the markets surprised us. The equity markets have staged a rally since July, with the Dow Jones Industrial Average (DJIA) hitting an all-time high. Does this mean the September-October correction we've come to expect will be delayed this year? Let's take a look at the economic landscape. In addition to the equity markets rising, the Federal Reserve has kept interest rates steady and is likely to do so at the next meeting; oil prices started rising, albeit not even close to the levels we saw during summer; US Treasury yields are headed lower, and the housing market is slowing down. Now, none of these factors are a severe-enough measure to suggest a serious slowdown in economic growth -- but neither are they indicative of stellar growth. So what does that mean? Will the equity rally continue?
If you look at the charts of the broader markets, as of this writing there's no sign of a slowdown. But markets have to correct at some point -- it is a matter of where and when. Whenever I see this much optimism in the markets, it tells me that buyers are willing to pay any price, mainly because they believe the uptrend will continue. At some point during those rallies, smart sellers enter the market and start selling. They do it in a subtle manner so as not to be noticed. Trust me, you're not going to see a sharp drop in value on the charts. What you will see is a market that starts to flatten or enter a trading range. The market will be relatively volatile during that time, with a lot of price swings. This change in behavior will still offer trading opportunities, however.
This issue's feature article, "Searching For (Trading) Certainty" by Aaron Lynch, acts as a refresher course on swing charts. The article starts on page 20. Regardless of whether the market is in a trend or trading range, you are only going to earn positive returns by trading with the trends. The STOCKS & COMMODITIES interview for the month is with the "original" encyclopedia guy, Robert W. Colby, whose name you'll recognize from The Encyclopedia Of Technical Market Indicators (2d ed.). In the interview, you'll find out about a technique using the stochastic indicator that you can apply when trading within a trading range. You'll find various ways to implement that technique in our Traders' Tips section, starting on page 76. The interview itself begins on page 48.
So when you see that volatility increase, it might be your first sign of the smart seller's game. But the market can surprise you, so stay alert and keep an eye on the swings and, more important, their turning points.
Here's to good trading. Happy holidays, and have a good new year!
Jayanthi Gopalakrishnan,
Editor
Originally published in the December 2006 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved.
© Copyright 2006, Technical Analysis, Inc.
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