- Money Morning Australia

The Single Best Piece of Advice for Stock Market Traders Today


Written on 17 February 2012 by Kris Sayce

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.

Related Articles

The Conference of the Year for Australian Investors

The Lesson You Must Learn as a Stock Trader

The Brave New (Broken) World for Stock Traders and Investors


Leave a Comment

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 moneymorning@moneymorning.com.au


TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery

openX sidebar signup form
Openx pos2
Latest Stock Market Updates
  • ^NDX4251.324+9.233 - +0.22%
  • ^FTSE6750.76+71.86 - +1.08%
  • ^AORD5343.500+51.400 - +0.97%
  • ^AXJO5356.300+52.000 - +0.98%
  • AUDUSD=X0.8686
  • USDJPY=X117.906
openX sidebar banner
Openx pos7
Iron ore leadgen
WWD dvd

World War D was billed as ‘the biggest investment summit of the decade’

It didn’t disappoint…


Absolutely mind-blowing beyond my expectations

– D.A.C. Hall


The BEST INFORMATION available,
contrary to mainstream economic reporting.

– L. Sceresini


Exciting, dynamic, passionate, informative, challenging, so professional... Brain-stretching.

– D Finlay


Click here to watch
the brand new Highlights Reel.

Blue Chips

Receive our unique and useful investments ideas straight to your inbox for FREE, enter your email to sign up:

x