The Single Best Piece of Advice for Stock Market Traders Today

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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.

What the Stock Charts Reveal
 

Take a moment to look at the stock chart below…

S&P/ASX 200 index
Click here to enlarge


Source: Google Finance

 

 

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).


Finding a Level

 

 

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.

(Murray explains this in more detail in his free weekly stock market update videos. Click here to watch now…)

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.


Stay Neutral Until the Time is Right

 

 

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.

Cheers.

Kris.

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Kris Sayce

Kris Sayce

Publisher and Investment Director at Money Morning Australia

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the editor of Tactical Wealth — where he reveals ‘special situations’ he’s discovered in the markets. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.

Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.

After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

Kris is also the editor of Tactical Wealth — where he reveals ‘special situations’ he’s discovered in the markets that you could profit from. If you’d like to learn about the latest opportunity Kris has uncovered, take a 30-day trial of Tactical Wealth here.

 

Official websites and financial e-letters Kris writes for:

(You can find a list of recent investment articles written by Kris at the bottom of this page.)

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Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@moneymorning.com.au