Caveat emptor: Nobody knows where the market is going for sure in the next hour, let alone in a full year. One should, therefore, run away from experts who claim they know where the market is headed. The past few years must have proven that to you. So that said, how does one play the markets profitably in 2012?
This trader has been humbled many times, and has learned from the markets to look for trades with a high probability of making a big profit and low chances of making a small loss.
The savviest traders and investors take small losses and get out of a position when they go wrong. Conversely, one should stay in a position for a long time and let profits run when one is right. Successful investors and traders have a simple rule. Never take your opinions seriously and personally in the market. If the market proves you wrong, just get out of the stock and carry on.
Having said this, you’ll realise that the headline of this article is a high-probability outlook and not a sure shot. And it's based on supply and demand points in the market along with the trend. As the cliche goes: the trend is your friend till the bend at the end. So our goal when looking at 2012 is to capture the trend and watch out for the probable bend at the end.
We will take a broad sweep of the financial markets to see where they are headed. The markets include India, China, Japan, US, Europe, the US dollar, gold and silver. The article will also identify the current trend of the market and spot high-probability turning points. Remember to always cut your losses when the market moves against you.
The most obvious way to identify a trend is spot a series of lower lows and lower highs for a downtrend and a series of higher highs and high lows for an uptrend. A lower low is made when the latest low in price is lower than the previous low and a lower high is when a latest high in price is lower than the previous high.
Given the fact that the trend of the market is bearish, a conservative trading strategy would involve shorting the market at resistance levels and taking profits at support levels. Aggressive traders can go long at support for quick counter-trend profits. Remember that any of the support levels can stop and reverse a downtrend or can just lead to a small correction.
Since one can never be sure where the market will turn, it's always best to take at least some profits at potential turning points and hold some positions to benefit if the trend continues.
The BSE Sensex
A look at the Sensex chart shows that the index has made a series of lower lows and lower highs. (Click here for the Sensex chart). The horizontal lines above the current price are resistance levels and those below are support levels. Prices often rally from support and sell off from resistance. Support levels are areas of demand as buyers exceed sellers and vice-versa for resistance.
In the case of the Sensex, it might go down to the 12,000-13,000 range as there is a gap at that level. The gap is shown by an arrow on the chart. Gaps happen when prices close at one level and open higher or lower the next day. In the case of the Sensex, the gap is huge, of nearly 950 points. Gaps happen because there is a huge imbalance of buyers and sellers.
In the case of the Sensex the gap was up, which means the number of buyers substantially exceeded the number of sellers. Gaps are also magnets for price, which makes us believe that the Sensex can reach the 12,000 to 13,000 level eventually, as the trend is bearish.
The US market
The S&P 500 index was basically range-bound in 2011 and is likely to stay so unless it breaks below 1,000 or rallies above 1,375. For the year as a whole, the index ended flat. As the global benchmark for equity markets, the S&P 500 has, over the past six months, been making lower highs, higher highs, lower lows and higher lows, which clearly signals a market in a holding pattern. But that's not bad as the trading range is wide at 375 S&P points, which can give some very good opportunities.
Based on price action, we have a bearish bias. A look at the chart shows that the index has quite a few resistance levels overhead in close proximity, making a strong rally difficult (Click here for S&P 500 chart). The support ranges, on the other hand, are wide apart. So a break of one can lead the index down much lower till the next level.
Traders in all countries should keep a close eye on the S&P 500 as equities globally have a close correlation to it.
What’s up for Europe?
The trend in Europe is bearish, too, as prices are making lower highs and lower lows. We are looking at an exchange traded fund (ETF) called the Vanguard European Index Fund, which tracks the Morgan Stanley Europe index (Click here for the Europe chart).
The only factor casting doubt on the downtrend is that the fund made a higher low, as shown by the arrow on the chart. However, it has still not made a higher high, which is a prerequisite for prices to turn bullish. If the price goes above $45, the trend could have changed. The horizontal lines above the current price are resistance levels and those below are support.
We are still bearish on Europe as the price has touched the support level between $36 and $38 twice. The more the number of times prices touch a support or resistance level, the weaker it gets. If that level is broken, prices can go all the way down to $31.
There is a fundamental reason for bearishness in Europe. Even if the continent does not spiral into a debt crisis, growth is expected to be slow, at the very best. On the other hand, some expect a double-dip recession.
Continues on the next page
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