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Markets
Traders look over the edge as market hits new highs
Jeff Cartridge - October 8, 2007
 It may sound easy to look at a chart of the market and determine whether the market is going up or down, but there are times when this is not so clear. In the United States, now is one of those times. The market has rebounded quickly from the fall experienced in July and August this year, and is now heading back towards new highs. Locally the ASX 200 has powered ahead to new highs, while in the US the Dow has just touched a new high and the S&P 500 sits just below its previous peak.
The ultimate stock market question is simply whether the market is moving up or down. This question is the basis of an entire stock market discipline known as Technical Analysis, and ultimately determines the profits or losses that an investor receives. If shares rise an investor or trader makes a profit and if the shares fall the investor or trader loses money. While many traders complicate the situation utilising a myriad of complex indicators, it is this simplicity that underpins the whole market.
Going back to Dow Theory, created by Charles Dow over 100 years ago, the definition of an up trend is a series of higher highs and a series of higher lows. While the ASX 200 has clearly made a higher high and continues in its up trend, the Dow Jones and S&P 500 are at an important junction. Can they push through to and sustain a higher high to continue the up trend? It is this question that will be answered over the next week.
Right now there is a classic setup for a pattern known as a double top. If the market fails to move higher and instead falls away the double top pattern is in place. If this occurs it can lead to sharp falls in share prices as more and more traders and investors start to reassess the market trend. A break below the previous low can lead to sudden sharp falls in the share prices as it signals a change in trend to the majority of investors. In round number terms this level on the Dow Jones is 13,000 and in the S&P 500 is 1400. A break below these levels could lead to sharp declines in the US market.
The strong rebound in the stock market and strong economic data (such as Friday's US jobs figures) would reduce the possibility of a cut in interest rates. The market, through the pricing of interest rate futures contracts, is currently forecasting a 100% chance of a cut in interest rates before the end of the year. Strong economic data, rising oil, gold, commodities and stock markets could lead to no change in interest rates.
Australia’s economic climate is far stronger than the US at present with strong exports of resources continuing to support the economy. Unfortunately sharp falls in the US markets are still likely to have an impact on the local market. Couple this with seasonal weakness that typically occurs in October each year and there is a strong case for taking a precautionary stance with your investing or trading at present.
Jeff Cartridge is the author of Supercharge Your Trading with CFDs. For more information go to www.superchargedreturns.com.au. Please note that the views expressed here are those of the author, not of CompareShares. Although all investing has some form of risk, CFD trading strategies are only for experienced traders and risk management strategies must be considered.
More articles from this week's CompareShares newsletter:
Property: How safe is Australia from a US style housing crisis?
Stocks: Fund manager stock pick for the long haul: 4 Hong Kong property stocks
CS stock lab: Guide to analysing stocks - part 3
Leverage: Comparing margin loans and instalment warrants - part 2
Markets: Traders look over the edge as market hits new highs
Economics: US and global economies going in opposite directions
Analyst report: Double-digit growth to bank on
Stock of the week: Envirozel Limited
Smart investing: Riding the currency rollercoaster
Commodities: The seasonal nature of global gold demand
Whatever your views, you can discuss this article - or any of Jeff's articles - on our message board Your 2 Cents.
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