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Well it is no surprise that we are seeing some weakness come into the markets! Is this because of Middle East unrest – or maybe turmoil? That is the bogey for markets at the moment. But remember when markets run like we have seen them over the last few months, at some point they do retreat. And at such times commentators look around for any old explanation. But the truth is any old reason will do as markets are really just doing their thing. Doing what comes naturally!
Let’s look at the DOW and see if we can tell what sort of retreat is ahead- a minor one or major? Even though markets do behave rationally, much of the time fundamentals take over, and if what we are now seeing in the Middle East was to become more tumultuous and chaotic to interrupt oil supplies then we could see a major and ongoing retreat.
But let’s look at the chart:
click to enlarge
The most important aspect of this chart is the oscillator, as that is what we will focus on the coming couple of weeks – which is a likely time frame for this retreat. We will be watching closely to track the oscillator back to zero. If it was to go below zero in a significant way for quite some time then that would spell a warning that we could be seeing an extended retreat or even a period of range trading.
To attempt to glean what may lie ahead we can look at a weekly chart:
click to enlarge
This chart suggests that an extended easing could be seen, thus bringing the market back to a range where the market spent much of 2010.
If a retreat was to gather momentum then we could see fear set in, and many investors who bought in 2010 may become concerned about some positions and we could then see selling gather pace.
We can but wait and see. Or we could be more proactive, but you need to be reasonably skilled to consider shorting or covering positions. And the time to up skill ‘shorting’, for example, is when the sun is shining – not when turmoil is ahead!
Enjoy the ride
Tom Scollon
Chief Analyst |