CHIEF TECHNICAL ANALYST
Q. Dear Sandy, can the financial markets be predicted?
A. The short answer is no. But many traders, especially newcomers to the markets, will search for the Holy Grail. They are looking for something which works all of the time or a strategy which can deliver large profits on a consistent basis. First, we should understand that the markets are not static but dynamic. We can then look for strategies which take advantage of volatility and market direction. There are times when the markets are known to have more volatility. For example, the opening and closing sessions of each trading day and key announcements typically see an increase.
Q. Dear Sandy, how can I take advantage of the volatility in the markets?
A. Once we know that there is a possibility or a high probability of an increase in volatility there are ways to potentially benefit from this situation. One is to look for the recent high or recent low of a price range. If the general trend has been bullish then we could assume that the increase in volatility may lift the market higher, beyond the recent high and breaking resistance. A buy stop order can be placed at this high so a break of the level would trigger your trade and at the same time initiate a stop loss order in case the trade goes against you. In a bear market you can reverse this method by selling the low point of the range and expecting a move below a support level.
Q. Dear Sandy, does this month typically see an increase in volatility?
A. Over the last 15 years, the S&P 500 has declined 80 per cent of the time from 16 to 24 September. If we have this fact at hand this does not mean we can predict that the market will fall again this year.
However, with the odds suggesting a move lower, using technical analysis we can improve our chance of catching a potential decline. If we note where short term support levels are and see the market start to trade below its 20-period moving average then we now have a market condition which may work in our favour.
As always it is wise to use stop loss orders to protect your position just in case the market fails to work as expected.
We can also look to see if around the forecast date the market is trading at a resistance level – and struggling to break above it. We should also check to see if there are key technical patterns such as a bearish head and shoulder or lower lows – if so, this could also suggest market weakness. So rather than trying to predict, using statistical and technical analysis methods may prove to be more successful in the long run.
Learn more about technical analysis with Sandy at his free City Index seminars.