The biggest danger for a stock trader is getting caught up in stock market hype.
You can be the most bearish trader there is, yet a few days of seeing the stock market cranking up can make you question yourself.
The same goes for bullish traders. They think the stock market is going to the moon. Yet a couple of days of big sell-offs and they press the panic button.
The thing is, you don’t know for sure which way the stock market will go until it’s gone there. Sounds obvious right? But that’s why it’s important as a stock trader to stack the odds in your favour.
And that usually involves technical analysis.
Take a moment to look at the stock chart below…
Click here to enlarge
To the untrained eye, it may not make a lot of sense.
But look again. What can you see?
You can see the S&P/ASX 200 index is down 16% from the April 2011 peak. (And it’s still down 40% from the 2007 peak.)
You can also see it’s up 8% from the closing low in September.
But you can also see a whole bunch of other rises and falls. With all these ups and downs, how can anyone make any sense of where the stock market is heading next? And how can you know which ups and which downs are more important than the other?
That’s where you need a trained eye. And that’s why we always turn to our in-house technical analyst Murray Dawes. Murray’s spent 20 years looking at stock and index charts.
So that even before he’s started drawing lines on the chart he’s got a good feel for where the stock market could go next. Notice we say, “could”.
Murray’s analysis is all about probabilities rather than predictions (as you’ll read below in an extract of a chat we had with him this morning).
Since last August, the stock market has done little more than trade around a few key levels. It’s what Murray calls the Point of Control (PoC). In simple terms, it’s the mid-point of a high and low range on a chart.
It’s from this point that all the stock market action happens. It’s a gravitational pull if you like. Unless the stock market has enough energy (either up or down) to break free of its pull, it will always move back towards the PoC.
The thing is there isn’t just one PoC. Depending on the timeframe (minute, hourly, daily, weekly, monthly… even yearly charts) a PoC always forms.
And now, the stock market is forming around a PoC that has driven it from as far back as last August. It’s the green line marked on the chart above.
As Murray notes below, “If the ASX 200 can bounce from this Point of Control at 4180-4200 (as it seems to be doing this morning) and if it can close above the 10-day moving average at 4239, that will be an intermediate trend buy signal…”
There are a couple of ifs in there. As we say, Murray’s analysis is about probabilities not predictions. It’s about figuring out what is most likely to happen based on recent price action.
And right now, with the stock market trading at the key PoC, we’re at a point where the stock market could see a return to volatility and go either way.
Bottom line: as a stock trader, you’ve got to keep on your toes – especially when using leverage. Because even a small move can put you under water quickly.
Look. We won’t pretend to know everything there is about technical analysis, that’s why we rely on Murray for that stuff. But even as a fundamental investor it’s important to know what the technical guys look at.
At the moment, the stock market is at a key point that could push it in either direction.
And based on what Murray tells us, it means you should have a neutral trading portfolio (a mixture of long and short trades). So, when the stock market turns one way or the other you can quickly add to your trades and benefit from the move up or down.
That way, with trades already in place, you can be almost assured of not getting caught up in the hype to buy or sell at the wrong time.