Friday, August 21, 2015

A wild week

This week has certainly been a wild ride - predominantly to the downside. There was a quick 300 point rally in the DAX this morning but that was quickly eroded, with price now back to the overnight lows.

This is a microcosm of what market downtrends tend to be like - sharp relief rallies followed a further lung to the downside.

In the same way that people have continually being trying to call the top of market uptrend which has effectively been in place since early 2009, the danger now is that these rallies can lure traders into the market thinking that the worst is over.

An example of this was back in October 2008 - on Friday 10th, there was a trading halt called after the Dow was something like 800 points down early in the day. There was a late afternoon rally once markets started trading, and this was followed by a 1,000+ point rally the following Monday! Yet the market couldn't sustain those gains, and the index ultimately fell to around the 6,500 level when the March 2009 bottom was made.

To give a comparison in terms of volatility, the 2ATR measurement I track shows a current reading for the Dow of below 400. Back in October 2008, it peaked at just over 1,000 - and those readings were when the Dow was below the 10,000 level. So in terms of pure volatility we are currently nowhere near the levels seen seven years ago.

The last time there was a burst of selling like this was back in October 2014, and the markets quickly rebounded from that. I haven't got a clue what is going to happen going forward, but price will show me the way.

Either way, sticking to your trading plan and having strong risk management remain paramount.

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