If there is one thing we have learned over the past few years it is the importance of taking your trading and investing cue from market generated data, i.e.: a markets high, low, and closing price. Once you know how to use those important determinants you can build a mechanical framework for determining a market’s pattern and direction. Having that black and white information in front of you is essential in a market place where the Keynesian policies of central bankers and politicians play such a central role in market movement – see Have Current Keynesian Policies Changed How Markets Move? This is because the prevailing policies today are counter-intuitive from an economic standpoint. I’ll give you an example. The weekend after the Xmas holiday we got together with a futures trader and his family – my friend has traded professionally for over 20-years. And he, like many traders, was perplexed that given the current certainty of higher rates for wealthy individuals, and the increase in the capital gains tax, and the 2% increase in the payroll tax, that the stock market was not much lower. I myself was not bearish because my analysis showed that price was holding support – see Figure 1 4-hour S&P 500 chart– and I understood what it meant to the markets several weeks’ earlier when Fed Chairman Bernanke said he will continue to purchase long-term treasury bonds – to drive interest rates lower – until the employment situation picked up. I also felt that with President Obama insisting the government needed to extend unemployment benefits to over 2-million people – over 2 billion per month multiplied by the velocity of money going into the economy – that being short near-term was a dangerous position.
Figure 1. 4-hour chart of S&P 500
I agreed with my friend that it made no sense from a conventional economic perspective, but I had enough experience to know that if the pattern in the market was bullish – and it was – that I was not going to try to fade the U.S. Executive Administration and the Fed.
I am a big believer that markets epitomize fractal geometry, and analysts and traders who have found themselves on the wrong side of the markets lately need to embrace market generated data, and distance themselves from conventional economic logic if it is not helping them to make money. The markets always tell us their pattern and their direction, and they will tell us when this changes. In the meantime it makes no sense arguing with the markets or current Keynesian policies if your job is to make money today.
Here is a link to a 20-minute webinar on how to improve your trade selection using the techniques talked about above — We are confident it will lend you insight into how markets move: News, Pattern, & Direction
To see Jay point out trade set-ups and signal in live markets go to: Live Market Analysis
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