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I’m writing this article on Wednesday and the Dow Jones has fallen 381 points overnight. In these days 381 points doesn’t sound like much, but with the DOW trading around the 8000 level it did represent a 4.5% drop.
The news channels indicated that people were sceptical about the upcoming US bailout package and how effective it would or would not be, but to be quite honest, I don’t pay much attention to news these days. News may have a short term effect on a market, as we will see below, but news rarely tells us that a major trend change is occurring.
I certainly didn’t rely on the news channel last year to tell me that August 15th was the yearly high on the Dollar/Yen (FXUSJY in ProfitSource) and that I should go short!
Markets don’t just move straight up or down – whether we are in a bear market or a bull market, there will ALWAYS be up days and down days.
Those of you who have read my previous Trading Tutors Newsletter articles would know I have been watching a Double Bottom setup on the US Dollar/Japanese Yen in recent times.
Chart 1 below shows the current position of the market, including the overnight market action.
Chart 1
click to enlarge
By the time you read this article, you will already know what has transpired, but the point I am making is that you need to look at each individual trading day in a bigger picture context.
Here, we have had a Double Bottom, followed by two equal swings to the upside and two retracements. We’ve had bad news, but the market hasn’t made a wild swing down, or fallen out of bed. It has retraced in an orderly fashion.
Now let’s compare this with the market action out of the August 15, 2008 yearly high on the Dollar/Yen. Chart 2 below shows the high and the moves coming out of that high.
Chart 2
click to enlarge
I have circled several sharp moves to the upside that occurred during this run down. Each of these up moves was preceded by a news announcement that was “interpreted” by the market in a very positive way and yet in each case, the market rallied into a lower swing top before heading back down.
People generally don’t buy or sell just because they feel like it – I say generally because there is always the exception to the rule – however there is usually a reason behind the buying or selling.
But that reason does not necessarily make a long term trend. In Chart 2 above, you can see that the news (the reason) only lasted a couple of days, before the trend continued down.
You won’t be right all the time – and sometimes the news actually will trigger a change in trend. But the safest way to trade is to trade with the existing trend.
Don’t worry about a news report that “tells” you that you are wrong. Let the market tell you whether you are right or wrong, in its own time.
For now, the trend on the Dollar/Yen remains up and the market is yet to tell us anything different.
Be Prepared!
Mathew Barnes
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