- Money Morning Australia

On the Crest of a Wave

Written on 19 October 2011 by Murray Dawes

On the Crest of a Wave

If you’re interested in finance and investing – and let’s face it, you wouldn’t read Money Morning if you weren’t – I’m sure you’ve heard the stock market described as being like a lot of things. A casino, baseball, a rollercoaster ride, a ticking time bomb…

But one of my favourite ways to think about the market is to compare it to the ocean.

Imagine every drop of water in the ocean is an individual buyer or seller of stocks. They make up the ‘market’ – the full body of water – the ocean. One minute they’re calm and the water is still. When they panic, it gets choppy as hell. Everything about the ocean, from the colour and temperature to the volatility, depends on the actions and feelings of those individual drops of water.

When they rush to buy a certain stock, they’re like a powerful force pushing a wave (or the stock price) up and up and up – into the type of wave it seems like you could ride all the way into shore. And when they sell, imagine a crashing wave that quickly rolls back into the ocean and doesn’t have the momentum behind it to build back up to the heights it reached before.

This is one way I like to picture the forces of the market at work. The push and pull of the price action.

Picture yourself, laying out in the middle of the ocean on your surfboard, watching for a sign of a wave that’s building or about to fall. When conditions are fine, your job as a trader is to drop in to catch these waves and ride them as long and hard as you can… and make big gains without putting your neck on the line.

Low volatility is the key. And that’s something I’d encourage you to keep in mind, whether you’re a trader or an investor.

Don’t get in the water when there’s a storm blowing up. Lightning overhead. Or when there are sharks in the water. And don’t try and catch a wave that is about to crash into shore. It’s all about patience. And timing. And making sure you’re set to ride that big tube when it comes.

This is one reason why buy-and-hold investors get ripped apart by the market. They have to ride every crashing wave, outswim every shark and weather every storm. They’re at the mercy of the ocean. As traders, we have the luxury of paddling back into shore, strapping our boards to the roof and waiting for our next moment from the comfort of our car.

We have entered a difficult period for the market.

There are now conflicting signals on the charts and we are a few weeks away from learning the details of the European bank bailout.

Anything can happen from here. After six months of selling pressure it is only natural that we see a bounce. How far the bounce takes us and whether the bounce is going to turn into a large rally is the big question.

3-Month Snapshot of the Aussie Market – Waves Rising and Falling
3-Month Snapshot of the Aussie Market - Waves Rising and Falling
Click here to enlarge
Source: Slipstream Trader

It all hinges on how the market responds to the European bailout.

My feeling is that the European leaders will announce a huge money printing scheme. I don’t know where else they are going to get the money from. If they do that then we may see a continued rally in the market until the music stops again.

Gold should take off to the upside if that happens.

There are certainly going to be opportunities for you as a trader going forward.

But at a time like this, you need to be patient. You don’t want to go shorting stocks when there’s such huge upside momentum. And you don’t want to buy right after the market rallies 9%.

For the traders I would say we will see some real action again soon. But the next few weeks may be rather quiet until we get some direction from Europe. Now is the time to be patient. And be wary of those sharks circling in the water.

For more in-depth analysis of my latest thoughts on what’s happening in the Australian market, please click here to view my latest free YouTube video update.

Murray Dawes
Editor, Slipstream Trader


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