Tom Scollon
Chief Editor
You are not alone.
Is it time to buy? This issue is never clear cut and I always maintain that at such times there are no neon lights flashing saying – “buy me... buy me”.
Retracements of markets is a topic I will be handling at TradeFest (www.tradefest2006.com.au) and it is a subject near and dear to my heart. I relish the daily challenge of buying on pullbacks and dips. In fact, this provides the basis for most of my investing. Pullbacks and dips can actually be very tame - if you understand them.
The key is identifying when a market has reached a bottom. There is no definitive moment when one can infallibly say, “this is the bottom” – at the time. My approach is to watch the oscillator, which is available in most analysis software. I look for the oscillator to come back to zero in broad terms. I say in broad terms as it may not come back to zero and the market takes off again. If this does happen, ultimately that market will come back to zero – without fail.
I also monitor the oscillator in case the stock or future falls too far below zero. If that happens, the probability of a sturdy recovery is much reduced and at that point I am inclined to look elsewhere for a play that will be more robust.
Patterns in the raw volume (not OBV) are also useful. The pattern I am looking for is firstly high volume as the market falls, then some range trading on lowish volume, and finally a pick up in volume as prices move higher. I also prefer to see a gradual move out of a pullback rather than the sudden reversal (temporary) such as we witnessed last Monday in the All Ords.
So back to the question, “Is it time to buy?”
If we apply the oscillator approach, then the pullback in our metals is incomplete and thus the driver for our market is temporarily sidelined. Thus, maybe our market has more to fall and at best, is unlikely to race higher quickly.
Whilst it may appear that some of our metals and stocks are approaching pullback completion, this is only on a daily chart. If you have a look at a weekly chart, there is still some way to go. Of course it is possible to take several months for a completion on a weekly chart and in the meantime we may see markets creep higher only to be hit harder later in the year.
I still like to do some buying at such times. I try to stand aside until the market settles. I put my toe in the water and maybe take one or two positions but I am quite happy to close these down if the market still has more to fall. If the market moves higher then I gradually build positions.
It is important to keep your hand in at such times, as these pullbacks are great opportunities and this market still has more to run. Even if the market falls apart later in the year, if you are trading short term for at least a part of your portfolio then there are large profits to be made.
Enjoy the ride
Tom Scollon
Chief Editor