Chaos in the Markets

Introduction

For an average investor, these past few years have been nothing but chaos, and no relief is in sight as the markets continue to chop up and down…at least that is what appears to the untrained eyes. The debates continue between the bulls and bears, with each camp making very convincing arguments, supported by charts and graphs showing the bull and bear scenarios. It is only natural that the markets are populated by both bulls and bears, otherwise there would be no market. But which side should you be on? And if you have been on the wrong side, what would convince you to switch sides? And when?

My trading model has a very simple method to identify the chaos, and tells me when the chaos is over. It is called "technical analysis". And because my focus is purely on the technical aspect of the markets, issues such as the economy, interest rates, the housing bubble, the deficits, the war, etc etc..do not concern me at all.

The big board. Can you see how obvious the chaos is? Does this look like a bear market? Should you be afraid of this market?

The Dow. The moving averages do a great job identifying the chaos, don't they?

SP500. The chaos lasted longer than the Dow and the big board, due to the contents within the SP500 index.

Nasdaq. The index everyone loves to hate. The biggest chaos occurred in this high flying index, naturally. Chaos is now over, although its difficult to see from the chart, take a look at the upper left corner, the box shows the EMAs are in an orderly manner again.

My Comments

from the technical perspective, the markets are always very orderly. In a bull market, short term moving average (MA) is supported by mid term MA, and mid term MA is supported by long term MA. In a bear market, everything is opposite. Chaos occur when the MAs cross each other, but chaos is over as soon as the MAs return to their bull market configuration. And the fact is that despite the chaos, the MAs were never in a bear market configuration. So much for those who insist that we are in a "secular bear market". There is a big difference between "what is", and "what could be". With this fact, how can we take advantage of the markets? When and where do we position ourselves? For that, we go to our "buy and sell signals".

At Traderscorporation, we tend to ignore the noise and focus on a few simple parameters which guide us in and out of the markets. The sell signal in Dec 2004 allowed us to take 10% profit on the RYAIX , which is a bear fund. Then the buy signal in May gave us a 5% profit, but we did not go short on the sell signal in June based on my most excellent analysis. On 7/05, I issued a major buy signal on tech, and bought the Q at $37.11. Commentators on CNBC is quick to remind us that despite the current rally, the Q is down 3% since January 1st. Meanwhile, our model has banked 15% profit, and currently sitting on another 5%.

Summary

Trading is not easy, but it can be simple. Technical analysis can be very effective as long as we follow the markets, and try not to get ahead of the markets by predicting and forecasting. Despite the modern and advanced technology, we still have trouble forecasting the weather, never mind the complex financial markets. Learn to respect the markets, like the way we respect the weather. Put on a raincoat when it rains, and put on your shades when the sun comes. Imagine how silly we would look wearing a raincoat in bright sunshine! That's how you would look if you find yourself on the wrong side of the markets.

Jack Chan at www.traderscorporation.com

17 July 2005