My article at the end of June went into detail about the
lack of volatility and how it had left many traders frustrated. I also explained how no volatility had
created a condition in the market which wasn't allowing price action to form
technical formations to which traders could act upon.
Since that article we have seen an uptick in volatility in
financial markets worldwide with major indices reaching all-time highs; however
over the past month complacent bulls have been shaken awake from the
bombardment of negative news flow from around the world. Financial woes at Banco Espirito Santo,
Malaysia Airline MH17 shot down with innocent civilians on board, tension
between Israel and Palestine and recently Argentina defaulting on
debt…again.
Although volatility, like oxygen is required to create
combustion, it is the source and level of control over the volatility that
concerns traders most. The volatility
which has been created in the last month has emerged from news events which
most traders would agree is out of their control. These violent bouts of headwinds produce
erratic movements with little sense to make of them.
Conversely, when it comes to dealing with technical signals
such as price action, support and resistance, whether it is lateral or
trending, they do generate a point of anticipation in direction. The volatility which follows through will
either validate or nullify a trader’s position. The benefit with using
technical analysis is the fact that it simplifies the trading process into one
standardized methodology and it is a forecasting tool in the sense that the
trader sees what is likely to happen on the chart before he executes the trade.
In saying that we can concluded that the reason why most
professional traders shy away from events such as earnings reports is because
they have no control over it, its pure speculation and a dent in their
edge.
When it comes to new traders, they often left licking their
wounds and trying to figure out what went wrong with all the turbulence. I can recall moments in my own trading when I
was still fresh in the game trying to profit out of news flow and coming off
second best. When it comes to working with volatility you need to use it in
conjunction with direction.
If we were to use the two together we are able to work out
the different markets that can be present.
1.
High Volatility with Trendiness; these are the
markets traders enjoy, trades work out quickly.
2.
Low Volatility with Trendiness; are slow to work
but price is a lot more stable, patience required.
3.
High Volatility with No Trendiness; extremely
dangerous markets to trade, erratic movements.
4.
Low Volatility with No Trendiness; very
frustrating markets to trade, often no follow through.
Now let’s put this to practice with the JSE Top 40 and see
what the price action has done in the last 3 months.
In the month of June the market jumps higher and begins to
path its way out to fresh all-time highs. Notice how the breakout occurs and
the subsequent retest at 45 500. From that point the market continues its
ascent until it is met with resistance at 47 000. Also note the size of
the candles in May, very small relative to the candles we saw in June, this was
the first sign that volatility was perking up.
The first time the index reaches 47 000 we see a sharp
selloff and the index almost comes back touch support at 45 500. It
turnarounds and has another go at breaking the resistance but fails once again.
Notice the trading action from that point, it as if the price is bouncing
around but not in any distinctive direction. Finally the index finds the
momentum to touch the resistance and once again we see a sharp selloff back
down to 45 500.
We can conclude that the trading action in the last month
has seen a marked increase in volatility and no trendiness. It has been statistically proven that traders
make less money in a sideway market than they do when the market is trending. Adding to the fact increased volatility from
news flow creates turbulent price action which is hard to execute from, we can
see why July was a very tough month for most traders.
But what can we learn from of the analysis above. Quite
simply wait for the technical signals to lead the volatility, trying to trade a
market that is dependent on news flow is comparable to driving a car without a
steering wheel. We know the key support and resistance levels
are going to be 45 500 and 47 000 respectively, should anything happen in
and around those levels take cognisance.
Finally, if you're not seeing anything happening on a short
term chart take a step back and pull the chart out to a longer time frame. The chart below is the same chart as above the
only difference is it represents 6 months.
Suddenly it all makes sense now. The Top 40 has been
trending in a very neat medium term uptrend but the uptrend has now come to an
end with the break which happened last week. What would this suggest, bias to
the downside, if the Top 40 were to pullback from where we are now my guess
would be we could come down to the blue line which represents the 200 day
moving average, that’s a level of 43 000, roughly 6.5%.
Again the key level is going to be 45 500, we have to
see that break and begin descending with a degree of trendiness before we can
be sure that a pullback is in place. Until then it’s best to watch from the
side lines.
If you would like to contact me you can through my email at cadetrader@gmail.com or if you wish to
follow me on twitter and get the latest updates of news, interesting commentary
and general trends in the market, my twitter handle is @CadeTradeR if you
follow this link it’ll take you directly to my twitter timeline: https://twitter.com/CadeTradeR
No comments :
Post a Comment