Q.Dear Sandy, will the FTSE 100 continue to climb in November?
A.Traders have been digesting a raft of information over the last few weeks. With the $600bn injection from the Fed and President Obama’s mid-term elections out of the way, the market has not reacted negatively, unlike what many traders had expected. When markets behave like they have so far, then there is only one conclusion.
This market is resilient. It just does not seem to want to head south and so far the chart patterns remain bullish. In this context, one can assume that until we see a major reversal pattern, the FTSE 100 is likely to head higher. The key level for the index remains at 6,000 and there are some minor hurdles along the way that the index will need to jump over.
Q.Which time frame should I use for short term trading?
A.What is short term trading? Five minutes, one hour or three days? You really need to decide what short term means for you.
Let’s assume that you don’t have time to look at screens all day and you would like to enter and exit positions for a few days at a time. In this case we would look at the weekly chart to determine the overall trend direction and use the daily charts for entry and exit. As an example, if the weekly trend is bullish and the daily trend is bearish then we would look to buy on the dips.
Conversely if the weekly trend is bearish and the daily trend is bullish then one would look to sell the rallies. You can use this same theory for different time frames. A day trader may be trading off five minute charts but look at hourly charts for trend direction. The idea is to use multiple timeframes and use the longer time frame as an indicator and the shorter time frame for entry and exits.
Q.Dear Sandy, do technical indicators remain overbought?
A.Even with the index at its current levels, we have seen various technical indicators remain in overbought territory. This does not mean that markets have to reverse. Quite the opposite, in fact. It simply means that the markets are much stronger than expected.
The problem with technical indicators is that they do not always work. Therefore it would be better to focus on price movements and use indicators as a confirmation tool. So if we see a week where the FTSE 100 opens higher and closes the week below the previous week’s low, this would suggest a key reversal. And if at the same time we see technical indicators turn sharply lower, it is at this point that we can assume a possible reversal may be at hand.
Learn more about technical analysis with Sandy at his free City Index seminars.