Gold prices fell to a near-three-week low on Monday. For those with an eye on silver the erosion of gold's recent gains should come as no surprise.» Read More
Earlier this week, a reader of my India market newsletter asked if I could analyze Satyam Computer Services. I prepared these notes on Monday (5th January) based on the weekly and the daily chart. On Thursday morning, I returned from Beijing to find the same stock was front page news. These are the notes prepared three days before the breaking news.
The stampede out of equities has driven investors towards safe haven assets such as the Japanese yen -- a currency that has risen sharply this year as its appeal grows whenever risk appetite wanes. With the financial crisis expected to intensify, analysts are now expecting further support for the low-yielding yen. Just how much higher can it go against the U.S. dollar?
It's the season of joy and goodwill. Except, there isn't much joy to be found amidst our gloomy economic situation. Will Santa arrive? Will he deliver a personal U.S. Treasury-funded bailout? Will it be a Madoff doll or brand new GM Chevy SUV? Will investors buy into the promise of future delivery based on credit earned for good behavior?
The American Big Three—General Motors, Ford, Chrysler— have followed a steady trend downhill. GM and Ford's stock prices have deflated like a punctured tire. However it looks as if Congress will pump back some air into the Big Three through an emergency rescue package.
Toyota is a different story.
Unlike the U.S. automakers, which show a ski slope trend line, Toyota's ADR chart is dominated by a head and shoulder pattern . These are reliable chart patterns that set achievable downside targets. The weekly chart shows a well developed head and shoulder pattern. The distance between the neckline and the head of the pattern is measured. This value is projected down to set the downside target. Toyota achieved this $55.00 target.
So what next? The answer is provided by the behavior of other stocks and indices which are further advanced in this pattern development. In these market conditions, the head and shoulder pattern targets have been exceeded by around 18 percent. Apply this average to Toyota and it suggests a $45.00 downside target. This potential is further confirmed because the $55.00 level is not an established historical support level.
The common pattern of behavior following this extra dip below the head and shoulder pattern target level is the development of a fast rebound rally. This is then followed by a retracement and another rebound. This activity develops a symmetrical triangle pattern. This is a pattern of indecision. We have indicated on the chart where this pattern could potentially develop.
The symmetrical triangle pattern shows there is still strong selling pressure. This pressure is defined by the down trend line. As the price rises, existing stockholders sell into the market. This selling -- desperately chasing falling prices to capture a small profit -- sets the downtrend line.
The uptrend line is a buyers line. Buyers wait for prices to fall and when the bargain price is irresistible, they re-enter the market as buyers. The up sloping trend line shows some buyers are becoming more optimistic. They are not prepared to let the price fall as low as in the past before they come into the market as buyers. This is a mildly bullish result, so it seems strange to call this combined pattern a pattern of indecision.
As seen in the past few weeks, a news event can trigger a selloff or a rally. In the case of a rally, a leading indication of this is the rise in volume which does not correspond with a rise in price.
This kind of volume increase suggests people are buying in anticipation of some kind of news that will affect the company. There may be rumors in the market. When the news is released the price and volume rise very quickly. This is a short-term trade opportunity. The trade is closed as soon as momentum declines. This may occur one or two days after the news announcement.
In the final installment of a four-part special, looking at the price/volume dynamic, we chart the game of Pass the Parcel. The aim of this game is not to be left holding the stock when the rumor is either confirmed or dismissed in the market.
Volume is the fuel that drives the market. Charts yield clues when volume is out of character. High turnover on a lower close indicates selling pressure -- people want to get out and no one is eager to buy, so the price falls. High volume on a stronger close indicates buying pressure -- people want to get in, but nobody is willing to sell, so buyers must bid higher.
In the third installment of a four-part special that looks into the price/volume dynamic, Charting Asia delves into volume activity reflecting a fast moving rally that, if traded correctly, can deliver good short-term profits for low risk before the rally retreats or moves sideways.
Catch That Rally!
Rally behavior is important as it's often the beginning of a change in the trend from down to up. Unfortunately many people think every rally is the beginning of a new uptrend.
A rally provides a five to ten day trading opportunity and must be managed with a tight stop loss. The way volume increases with price, separates a genuine rally from a skilful example of price manipulation in a 'pump and dump ' scheme. It also tells the trader when there's a 'dead cat' bounce. These are the rules.
Market volume is very significant in short-term trading. The relationship between price and volume provides a guide to the type of buying or selling activity that is developing. Charting Asia presents the second installment of a four-part special that looks into the price/volume dynamic.
In the last column, we looked at the trading game of Pump & Dump . This edition looks at the trading game of Hide and Seek.
Hide and Seek is when an investor tries to build a large position in a stock without causing the price to rise. Basically, this kind of volume activity is the genuine accumulation of a stock for long-term holdings.
Market volume is very significant in short-term trading. The relationship between price and volume provides a guide to the type of buying or selling activity that is developing. Over the next two weeks, Charting Asia presents a four-part special that looks into the price/volume dynamic.
We kick off by looking at the games traders play.
Traders and investors are constantly playing games in the market. Market volume is a record of such activities. Careful analysis of the relationship between price and volume tells us which game is in play. You keep score by calculating the difference between your entry price and your exit price. What games are out there?
Pump & Dump: This is where desperate individuals play bully with a small stock and use small volume trades to push up price. This price rise is irresistible to other traders and they buy in the hope the price rise will continue. They are tagged when the price manipulator pulls out of the market.
Hide and Seek: This is when an investor tries to build a large position in a stock without causing the price to rise.
Catch that Rally: This is when investors capture a short burst of activity in a fast moving rally that, if traded correctly, can deliver good short-term profits for low risk before the rally retreats or moves sideways.
Pass the Parcel: The game starts with volume based on rumor. The aim of this game is not to be left holding the stock when the rumor is either confirmed or dismissed in the market.
This column details the share manipulation game of Pump & Dump. Here, the manipulator buys a significant volume of shares. Others see the price movement and join the rally. The manipulator then sells to these new buyers and captures a quick profit. The price is 'pumped up' and then the shares are 'dumped' or sold to unsuspecting buyers.
The key question facing markets these days is the difference between recession and depression. A recession is an economic slowdown that may last for 6 to 18 months. A depression is an economic pullback that may last from two to four years. We'd rather not have a recession at all but if we have to choose one or the other, I'd rather be recessed than depressed!
In either case, the market moves in anticipation of the event. The market decline develops before the fundamental signs of a recession or depression become evident. The market leads the confirmation of conditions.
The SARS plague was an Asian nightmare that threatened the world. Events in Asia were closely watched to assess their impact on the rest of the world. Its spread, and eventual containment, was measured by thermal imaging devices in airports.
This year brings SARS 2 – Severe American Recession Syndrome. Its heartbeat monitors are the Dow Jones Industrial Average and the S&P 500. We use the monthly S&P 500 chart to measure the temperature and track the recovery.
Obama says Washington welcomes China's rise but engagement with Beijing would not come at the expense of Asian allies.
Hedge fund managers like Eton Park and Eclectica are still bullish on Japan despite a painful start to the year.
Reports in the Chinese media said the Chinese central bank raised interbank interest rates, putting a crimp on lending.