Not financial advice. Full disclaimer available here.
Back in 2017, I took a course on technical analysis. The teacher, a veteran trader from London, showed the class an indicator and then asked us where the market was going to check our understanding. Naturally, we replied up or down depending on the setup. The trader smiled at us and said: you don’t know.
A few minutes later, we learned a different strategy and the same question came up:
Trader: where is the market going?
Students: up
Trader: YOU DON’T KNOW!
Indicators provide signals for going long or short but they don’t predict the future. Technical analysis (TA) is a game of probabilities, not a crystal-ball type of tool. TA is valuable for 3 things:
Risk management
Psychology
Timing
Risk management to define entry and exit points. Psychology to understand market sentiment and positioning. Timing to inform when to trade.
Yesterday, markets found support at key levels, suggesting we could see a rally if we take out the highs of yesterday. Here is a chart of the Dow Jones, a proxy for stocks:
Next is an inverted chart of the Dollar index, a proxy for investor risk appetite: 1
Lastly, here is a chart of copper2 , a leading indicator of the economy:
The prevailing trend is still bearish and, as I said last Sunday3 , financial markets could get very ugly in the coming weeks. However, the time to sell risk assets was in the earlier part of the year.4 Now, I am more interested in catching the next move on the long side than the bottom of the current decline.
So, what will next quarter bring?
More volatility is my guess. We are in a global bear market so odds favor another leg to the downside. If we keep going at the same pace, fear may take the better of investors and cause them to trade carelessly. Extreme fear is the ultimate indicator to get long and aggressive. Most years though, we just don’t get that opportunity. So it’s important to invest on while being ready for the big moves ahead.5
Yesterday, I added Bolsa Mexicana de Valores to my portfolio as part of the emerging market theme. Bolsa is a no brainer in my view.6 I also took a position in silver (PSLV). Silver is effectively the same trade as gold.7 But it’s much cheaper and the supply response to higher prices is muted because silver is primarily mined as a by-product of other metals. It's also a much smaller market than gold and a key resource for the industrial sector.
See macro threats section in the thesis on Poland
Check out the analysis of leading copper miners
See don’t panic section in the article EM troubles
If you haven’t already, read:
If you have, read them again. It’s worth revisiting.
My bias is bearish until the US-mid term election is over (November 8th). After that I expect the bulls to regain control. But remember: I don’t know!