As I sit here prior to the market opening on 28 October digesting last night's 340-point rally on the Dow Jones and the 3.5% rise on the S&P 500, it looks like we are in for a stronger day after yesterday's ASX trading halt due to a technology glitch. Today will also bring technical signs of a broader recovery as the local market tackles the important 50% of the year high-to-low zone. The key question of course, is can it hold?
As a trader, I don't need to have an opinion as to whether the market will be up or down. As long as it moves it presents opportunities for those who know how to spot such shifts. While we're on the subject, and to counter some recent posts made in relation to my articles here: I don't manage other people's money so I don't have a vested interest in telling other people what direction to trade so I can profit personally. I am wise enough to know that telling the market what to do is a sure-fire recipe for losses. I prefer to identify trends that can be found in the "witchcraft" known as charts. (More from Aaron Lynch: Who's For The Heavy Lifting?)
Back to the subject at hand - the good news rally that has occurred off the back of the baby-steps plan to resolve the debt issues in Europe. The old adage says "buy the rumour and sell the fact" and even though the details of the package are thin, traders and investors love a good (or bad) story and so we have seen a large rally. It will be interesting to see what the volumes are like in support of today's moves. They could be the best guide as to whether the market tanks as quickly as it has risen.
Today's potential upside will produce opportunities more geared to those with a shorter time frame. Chart 1 shows that yesterday the market reached the half-way point (or 50% of the year high-to-low). This 50% zone is commonly watched in charting circles and can act as support or resistance. This chart is the SPI 200 Futures market - an index that follows the pricing of the top 200 Australian shares. As I type, the market is looking like it will open at around 4,417, well above the 50% level of 4,362. (More from Aaron Lynch: Golden Times?)
The old top of 4,349 on September 1 could act as support if the market comes back to test that level, so price action above that level will lead me to bias trades to the upside rather than the downside in the near-term. Of course, this should be accompanied by strict money management and protective strategies in case the market goes into reverse.
As the Europe deal is more rigorously scrutinized, the market will process its approval or disapproval, which could lead to a sharp movement either way. The solution in Europe is still not at the point where price shocks can be ruled out. More volatility is likely until the path out of the crisis is clear but for the moment at least, we could see improvement. (More from Aaron Lynch: More Of The Same-Gaps)
The global bond markets have had some heat taken out of them and this is a positive sign for higher equity prices. The U.S. dollar is again under pressure and higher commodity prices will follow. Early November will be a testing time for the market and if it is still strong after that period, we could be on the right track. Then again, we may look back on this week as another example of "buy the rumour and sell the fact."
Good Trading
Aaron Lynch
