The New Market Indicator

[Ingot54 13]

THE NEW MARKET INDICATOR

 

 

Whether we like it or not, today’s markets are trending … trending away from Technical Analysis … away from sound Fundamental Analysis … and trending towards the previously-neglected third member of the trio … SENTIMENT ANALYSIS.

 

For evidence of this look no further than the events of the past 5 years.

 

Since 2006 I have been writing about, and lamenting the decay of Fundamental factors as drivers of currency trends. In 2006-2007 we saw the Dow Jones Industrial Average “rising because oil is rising” and “rising because oil is falling.”

 

In fact the price of oil as a driver of market activity has diminished … for the moment … unless you trade the currency of oil-based economies like Canada. Why? Because of market sentiment. Forget the Fundamental drivers … and forget the Technical reasons for moves in markets. Those things are still taught as elements of market analysis, but are becoming more dissociated from the reality of market movement than at any time I can remember.

 

A new terminology has emerged over the past few years, given as the reason for the absurdity in market behaviour.

 

That terminology? Risk-on and Risk-off.

 

In other words … Sentiment!

 

And in still other words … emotional perception.

 

Why is it that we still hope to make sense of a market where the main driver of activity is the perception that it is “more ok” today to take a risk than it was yesterday?

 

I believe this comes right down to traders taking of a mental position on where we think price is going to go, as opposed to the high probability of where price is likely to go, based on more tangible factors, rather than sentiment.

 

So many of us struggle to analyse the markets technically and fundamentally (or combine both) to gain our edge.

 

The markets have been preoccupied with the concept of entire nations being declared bankrupt – even when they have been technically unable to repay their borrowings for several years. Debt has been heaped on debt as the day of reckoning has been pushed further into the future.

 

For Greece (and soon the other members of that dubious group – Spain, Italy, Ireland and Portugal) the day of reckoning is at hand. Traders and watchers are no longer mesmerised, but highly anxious to secure an outcome that will not see any disastrous collapses.

 

Is collapse inevitable? I do not know. But those in the world with the problem of having too much money and nowhere to keep it, really do have a problem now. For the past few weeks the investing world has been hanging on the outcome of meetings of Eurozone financiers. Two days ago they got their decision – the bailout of Greece, and the recapitalisation of the banks seems assured.

 

The Risk-on crowd have emerged jubilantly and the EURO currencies have soared.

 

Fundamentally, things have just gotten worse – further debt has been created, just as some debt has been written-off. A partial solution … a temporary solution … nothing more.

 

Europe is sowing the wind with their bailout … and I sincerely hope they do not reap the whirlwind. I believe they have weakened their ability to withstand the financial pressures ahead. Have no doubt – the debt can only be settled in one of three ways – eventual default, austerity measures over a very long period, or hyper-inflation.

 

Technically, things have gone into disarray – just as the natural ebb-and-flow of prices seemed to have become orderly again.

 

Sentiment seems to have taken over the markets.

 

So how can traders turn this to their advantage? How can we use Risk-on and Risk-off sentiment to make money in this seemingly chaotic trading environment?

 

The answer is in re-thinking the way we approach our trading. When markets are euphoric, as we have seen over the last couple of trading days, prices over-shoot far more than they rationally should, creating an excellent advantage for technical and fundamental analysts alike. This happens regularly in all time frames and is nothing new. What is new is the extraordinary range of these moves that we are now seeing.

 

When price “goes parabolic” it will naturally suffer a correction – frequently based on the soundness of established indicators.

 

In my forex trading signal recommendations, I aim to exploit this new market sentiment, and occasionally some of my signals may not seem to make much sense. Sometimes I will be correct, and occasionally I will be quite wrong.

 

The signals are meant to be a guide and are the result of the thinking of just one person – me – who is infinitely smaller than the markets. In truth, I have no idea at all what the markets are going to do next. So do NOT put real money on my signals.

 

My free signal service is updated daily on week days, but usually I don't place much weight on signals for Mondays and Fridays. The signals are only there as a guide to complement your own analysis, and are NOT designed as stand-alone trading recommendations.

 

Best wishes

 

Ivan Ballin (aka Ingot54)

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