When
markets fall back we never quite know where they may finish – where their
retreat may end. We don’t know whether
this is a major retreat or merely a minor pullback or a dip. Over the years in Trading Tutors I have
written many times about what is the difference between a retreat and a dip or
pullback or a reversal. You may care to
revisit for a ‘refresher’
We do not
have ‘20/20’ vision so we don’t know what is ahead. Sometimes we can sense this is only a harmless
dip or small retreat and other times we might fear the worst but the worst does
not happen as we anticipated.
So we don’t
know if it will be an orderly or even predictable retreat or whether it could
be at first benign but then something really nasty is looming. Just like in so many other aspects of life.
So is this
current ‘unease’ merely order playing out or is it something more sinister? Let’s look at the charts:
XAO Daily
Click to Enlarge
XAO Weekly:
Click to Enlarge
Note that
both charts have an oscillator which is a useful indicator to try and aid us in
assessing whether retreats are benign or not.
It aids us but as with many life issues such as medical diagnosis there
are no guarantees. We are therefore more
concerned about probabilities.
The daily oscillator
indicates that the market is unlikely to recover from here. That is in the daily context. So we then focus on the weekly chart and
there seems at this point a reasonable probability of an orderly retreat taking
place. But as you know with weekly charts
it takes more time and it could be another 2-4 weeks before we get enough data
to give us a sense of confidence.
If the oscillator
goes significantly below zero as we have seen with the daily chart then we
would need to turn to the Monthly chart:
Click to Enlarge
But that
could take a couple of years to unfold!
For many reasons
we have become used to markets trending strongly – up or down. There have been few extended periods in the
last couple of decades when markets have range traded for an extended period. That is still an option but does not seem
that likely for now.
But we
assume nothing. So it is always
advisable to do regular housekeeping – cleaning out stocks that do not meet our
criteria. That will not protect you if
there is an overnight disaster but it will help to minimise damage.