Current market volatility and staying the course

In the last couple of weeks we have seen an ever-increasing level of volatility within the context of a sharp drop in price in the major market averages.

We have also started to see intervention in the markets by governments and regulators - additional liquidity being provided and interest rate cuts, as well as market trading halts (up and down) being triggered and the introduction of short selling bans on certain stocks.

Some random charts

It's been a while since I have posted some random charts, but here goes:

It is interesting to note the pattern currently developing in the German DAX. You can clearly see the 'staircase' of higher and higher lows in place from early December last year before price stopped moving up in June.

Adding some accountability to your trading - helping a day trader to improve

A while back I was approached by a day trader who wanted some help in improving his performance. This took me back a bit - as readers of this blog may know, when I started trading back in 2003 it was as a day trader (and I initially struggled) before I got into trend following.

I've long believed that the essentials of good risk management and being able to avoid mental errors are applicable to ALL types and styles of trading. This would therefore be an interesting exercise - for both of us.

A broader perspective on 2015

So that's another year come and gone - and one of the weirdest from a trading perspective. I've seen one or two people refer to 2015 as 'The Year of the Failed Breakout', and I certainly wouldn't disagree with that!

I can remember that moving from 2010 to 2011 seemingly changed the state of the markets from a trending to a non-trending state - certainly on my preferred timeframe. It was literally like someone had flicked a switched on 01 January.

These kind of changes can occur at any time, and when they do, we never know how long the new market state will last for. And, in the case of the markets switching from a non-trending to a trending state, we do not know what the magnitude of the new trend will be - or initially even the direction it will take.

That was the week that was

Last week will have been an educational experience for many people, particularly those who have started trading since 2008.

Since the major market averages bottomed out in early 2009, they have generally been in a steady uptrend. There have been one or two short periods where there has been some downside volatility (August 2011 and early October 2014 spring to mind) but they were small beer to what happened over the last few sessions.

Then again, we still need to put this into perspective, particularly with people calling the beginning of the week a crash or even 'Black Monday'. Last Monday, the FTSE and DAX fell more than 5%, and the Dow fell just over 3.5%, although intra-day it fell a lot more. Back in 2008, the Dow fell more than 7% on more than one occasion.  And further back in 1987, the Dow fell more than 22% in on the real 'Black Monday' - now that's a crash!

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.

I'm sitting tight in these...

Despite the Dow and Nasdaq indices giving short signals a couple of days ago, I did not follow them and start switching my bias to the short side. Why? Because my existing long positions were holding up (refer to this post for more), combined with the uncertainty over the US and its 'Fiscal Cliff'. As a result, 2013 has started for me in positive fashion.

Fiscal cliff and other market unknowns

The buzz words or phrase that everyone is referring to at the moment is 'Fiscal Cliff', and the possible impact it will have on the US economy, as well as the markets.

As it happens, the US indices have performed an abrupt about turn over the last few sessions of the year, and are now on short signals. Perhaps unsurprisingly, the major European indices are showing greater strength, but are also being dragged down in concert.

The rally keeps on going

The charts below show that both the FTSE and DAX have now made marginal new highs. The US indices somewhat lag (shown the S&P below) but have also made new highs off of the November lows. In all cases there has been a sustained rally over the last month or so, with very few 'down' days in that period.

A muddled picture

As the various charts shown below highlight, there has been a complete reversal in direction in many of the major instruments that I follow. The major indices, commodities, and forex pairs I keep track of (but do not trade) as they determine in which direction the bias for my individual stock positions should be.

This market's making a fool of me!

With a wonderful sense of timing, no sooner than I commented publicly on Friday that a couple of potentially key levels in the indices had been breached (being Dow 12,500 and DAX 7,000), then the markets decided to do an about turn and shot up. This continued yesterday with a strong start to the week. With my current bias in my portfolio to the short side, this resulted in an erosion of profits. To top things off, my remaining long positions decided to stay flat!

Trends vs value

Trend following is basically a timing mechanism that tells you when to go long or short on a particular market, as well as when to exit any existing positions. Some people do not like to trade unless they have an understanding of the reasons behind a move in a particular market, relying on some form of fundamental analysis for this. The danger with this is failing to heed the warning signals when an existing trend finishes and shows signs of reversing.

FTSE and DAX trying to follow the US

These charts again show why I do not trade indices (due to their inherent volatility), but simply use them to determine my directional bias when selecting individual stocks to trade. Both FTSE and the German DAX have moved from near new-highs down towards new lows in a matter of a few days. As previously mentioned, the US indices, gold and silver, oil and EUR/USD are already on a short signal - these two indices have stayed stronger for longer but are now falling into line.

Learning the skills to be a trend follower

I had an interesting conversation today with one of the other traders in the mentoring programme, and the current state of the markets. Currently we are in the position whereby the US indices are on a short signal, yet this has not been confirmed by either the FTSE or the DAX, which are both showing higher relative strength, considering the still-fragile state of the Eurozone.

Interesting times

Despite the markets' best efforts, the downtrend in the US indices appears intact. Over the last few days EUR/USD (chart below) has also joined the party and given a short signal. The key drivers or catalyst as to the price direction in an index, currency or a stock are an irrelevance to a true trend trader. Price is all that matters.

Market indecision

Both the FTSE and the German DAX are showing strength after giving intra-day short signals a few sessions ago. The pattern of lower highs and lower lows is still intact, so therefore the benefit of the doubt is given to the short signals, which are definitely in place on the major US indices (charts of the FTSE, DAX and Nasdaq below).

All routes heading south

As mentioned in my recent posts the major US indices have been the weakest, with the Nasdaq leading the way. Today both the Dow and S&P have triggered short signals. The DAX also briefly gave a short signal before trying to rally (Dow and DAX charts below). The FTSE has not given a short signal as yet, but is now a lot closer to doing so.

The volatility continues

The indices are currently bouncing around, undecided as to which direction they want to go ( I've shown the Dow below). As soon as a long signal is given, the market reverses and drops down to give a reverse signal. The last two sessions last week saw renewed strength, with the Dow topping 13,000. Seemingly whoever opens their mouth (and what they say) in relation to the Eurozone situation is pulling the markets first in one direction, then the other.

Indices about turn?

I've shown below the current charts for the FTSE and the German DAX which highlight the sharp move downwards this week so far.

Some random charts

Here are some current charts as of now - I will let you interpret the signals and trends on them: