Opening Position
October 2008
Since mid-July
2008, it appears as though some change has been taking place in market sentiment.
We saw the US dollar bouncing up after a drastic plunge that has endured
for several years. Commodity prices started to drop, and the equity markets
seem to show some strength. Does this mean that we have seen the bottom in
equities?
Unfortunately, it's too soon to tell. There is no way you can forecast
the markets, but what you can do is see how the markets have performed historically.
If you look at how the equity markets have performed and where they are now
with respect to their historical performance, you will see that what seems
like a recovery in the markets could easily be just a bounce in a secular
bear market. In the grand scheme of things, the equity markets still look
bearish, and bear markets can throw many teasers; they tend to display more
sideways movements and volatility than in bullish markets. You need to be
more careful when you participate in a bear market since, realistically,
all your gains could be wiped out in a matter of hours. So it makes sense
to play other markets that are not correlated with the equities.
While equities
were falling, the gold and oil markets went through a roaring bull rally
that took the prices of oil and gold to all-time highs. The high price of
oil affected consumers all over the world. It went up too far too fast and
ultimately, as with all bubbles, it burst and prices dropped. And as the
price of commodities dropped, we saw strength coming into the US dollar.
The greenback has been in a bearish cycle since 2002, so there is a strong
chance that this spike could be more than a bounce. If it is the beginning
of a bullish cycle for the dollar, then it will be a long, steady climb in
its attempt to revert to the mean. Even in a bull market, you're not going
to see a straight run up. There will be ups followed by downs. If it ends
up being a sharp, quick rally, then it means the speculators are probably
behind the move and it is not going to last very long.
It's worth keeping an eye
on the US dollar since a shift in its cycle could affect your trading opportunities
in the forex markets. Whether it is a bear market correction or a trend reversal,
you still have to use disciplined money management strategies and follow
your trading rules to protect your capital. After all, there are always surprises
lurking in the market.
Jayanthi Gopalakrishnan,
Editor
Originally published in the October 2008 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2008, Technical Analysis, Inc.
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