Q. Is this stock market rally for real?
A. With the recent rally in the stock markets, many traders and investors have questioned whether it can continue. It seems that every time we see the market edge higher, the thought of a major decline is at the back of our minds. But in reality what we should focus on is not our fears, but rather what the market itself is telling us. It is easy to think of a scenario and then fall into the trap of believing that the market will respect our wishes by delivering exactly what we anticipated.
However, markets rarely behave the way we think they should behave. The reality is that the stock indices have climbed higher and broken above key resistance levels. This has created a classic bullish chart pattern of higher highs and higher lows. Until this pattern reverses, we can say that the bulls are in control.
Q. Will the FTSE 100 reach 6,000?
A. Since the July low of 4,790 the FTSE 100 has gained 20.81 per cent and it seems that there is more to be added given the current move. So far, the index has broken above resistance levels and momentum has been strong. It is also trading above its 20-day moving average, all of which suggests that if the index does not reverse right now then the odds are that we could be looking at the key psychological level of 6,000. Technically speaking, there is a major resistance band between 6,047 and 6,117. At that point, all the bulls will be screaming that we are in a bull market and they may even be right. But historically, when markets reach major resistance levels, there is often a sharp reversal. At this point, all we can do is wait patiently and trade with the current trend.
Q. Do chart patterns work in very strong markets?
A. The short answer is yes. But where traders get things wrong is when we force our own belief systems into a narrow focus. In other words, we see what we want to see. The FTSE 100 had a classic head and shoulders pattern, suggesting a bearish move could be at hand. But at the same time, savvy traders also observed a reverse head and shoulders pattern, suggesting a move higher. By just observing and respecting what the market is actually doing, we can sidestep our opinions and use chart patterns as a guide. Using chart patterns with the correct approach can often yield favourable results in the long run.
Learn more about technical analysis with Sandy at his free City Index seminars.