Sunday, October 12, 2014

New trends equal new opportunities

Below are the weekly charts on the broad-based Russell 2000, as well as the UK's FTSE All-Share (the headline FTSE 100 is showing the same pattern). As you can see, short signals have finally been given. I have also shown the German DAX, which has also given a similar signal.

Although I trade off daily charts, looking at longer-term timeframes can clarify that even longer-term trends are in the same direction as your preferred timeframe.

As can clearly been seen, these consolidation (potential topping out) phases have taken several months. Even using very basic trend analysis, and ignoring the price channel lines, there is now a pattern of lower highs and lower lows starting to develop. This is something I have observed developing and first posted about back in May, with a potential disconnect forming in the US.

I've often referred in the past to the contraction in volatility, which can act like the coiling of a spring. When the spring is released there is a major move in the direction of the volatility expansion. Prior to this breakout, The Volatility Factor indicator on the FTSE All-Share has not been this low since my chart starts back in 1995. On the FTSE 100, this is the lowest volatility reading going back to 1985. The next lowest reading on a short signal was back in 2002. On the Russell 2000, the last similar reading was back in late 2007.

I was getting quite excited about all this on my members' twitter feed earlier this week. In effect it's the first signal given on the FTSE for more than a year - we've been stuck in range for about 18 months or so. While individual stocks can and do trend very well regardless of what the general market is doing, when the indices themselves start to trend, then that is when the big moves in a lot of stocks tend to come along. In other words, the odds start to increase in our favour.

Of course, there's nothing to say that these signals will quickly fail. Breakouts do fail - often. However, as I tweeted earlier this week, it is a trend followers' job to follow the trends, and trade in the same direction. Now that we starting to see new potential trends in the indices, then there will be new opportunities to profit from downtrends in individual stocks.

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