In my last few essays I have been introducing you to the different characteristics of the widening distribution. I want to show you how you could use this knowledge to help you in planning trades.
This week we will really get stuck into some of the theory so that any of my future articles about potential opportunities make complete sense to you. Let’s revisit the widening distribution that I began explaining to you last week and delve a bit deeper into it.
Rare earths went through the roof in 2011, creating a short-lived spike in a lot of rare earth related stocks. That rally fell back to Earth with a thud, and rare earth stocks have all suffered a huge correction in their prices over the last few years with a few false starts all being snuffed out.
Fundamental analysis is incredibly important. I am not one of those purists who think that charts are all you need. I spend most of my time doing fundamental analysis because my technical analysis theory and risk management processes are set in stone.
Whether markets are range-bound or trending, there are certain areas where reversals often occur and there are various ‘Points of Control’ around which the market oscillates. There are ratios based on the size of ranges that inform future price action both internally and externally from the range.
In my experience it takes about three cycles of elation to despair before a trader finally throws in the towel and dumps the position. Often at a loss.
The coming gas shortage on the east coast of Australia is getting plenty of attention in the media recently, so I thought I’d spend today having a look at a few companies that could benefit.
The quarterly charts are still pointing to the possibility of at least a balancing up correction in prices back to the middle of the recent range of around 2650 (7% below current prices). But the quarterly chart can take a long time to play out, so we must focus in on the shorter-term charts to find trading opportunities.
There are now a lot of ducks lined up for a short sharp fall in the S&P 500 towards 2650. I think there is the prospect that prices could eventually fall a lot lower than that, but that’s all conjecture at this point.
Last year in the week after Match quad witching the S&P 500 fell 6.5%. If you look at the last 30 years of returns following March quad witching the average return is negative, so it makes sense to consider whether volatility may pick up in the immediate future.