May 2004
In the last issue of STOCKS & COMMODITIES, I mentioned that all the broader indexes, if they had not already done so, were approaching their 50-day moving average. As of this writing, both the Dow Jones Industrial Average (DJIA) and the Standard & Poor's 500 have caught up. Why the sudden change in sentiment? Recent global terrorist attacks such as the Madrid bombings and the assassination of the Israeli Hamas leader sent the markets plummeting. Such events sharply increase investor fear, sending everyone rushing to sell their positions. Such crowd behavior has a strong effect on the market, the effect being one of an even greater magnitude when pessimism prevails. Investor sentiment moves in cycles. The swings between fear and greed have existed since Tulipmania in the early 17th century and will continue to do so for as long as the financial markets exist.
Each rise and trough of cycles is accompanied by some interesting market characteristics. Our S&C interview this month with John Murphy, starting on page 72, will give you an idea of how various markets interrelate with each other, especially at extreme levels. And if you're uncertain, which is often the case, it may be best to pull out everything you have until things start to make sense. The markets are actually a complex web, and the behavior of one market does affect the behavior of another. If you are going to be participating in the markets, it's not a bad idea to get some idea of how different markets are interrelated. After all, you don't want to enter a trade when markets are approaching a top. Similarly, you don't want to short positions when the markets approach a low.
There are various methods you can apply to "trading with the trend." One such method is discussed in our feature article, "The Inverse Fisher Transform" by John Ehlers, starting on page 38. Another method is an indicator known as the phase change index, which enables you to determine which phase a market is going through. M.H. Pee discusses that starting on page 28.
You may have no control over the insecurity that exists in our world,
but your financial security is something you can control.
Jayanthi Gopalakrishnan,
Editor
Originally published in the May 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.