The questions that we at LS trader are asked most currently is where we think the stock markets are headed and where we think the bottom of the market is and what are the best spread betting strategies for today’s markets. This is a very common question these days and it seems to be on everybody’s lips these days.
My personal view is that nobody knows and regardless of what fundamental analysis or technical analysis you use, the bottom line is nobody knows. There are a huge number of very smart people who try to use all sorts of research and indicators to predict where markets are going but the fact remains that it just can’t be done consistently enough to make it a worthwhile approach.
Subscribers to LS Trader or regular readers of my blog will know that I don’t put any weight at all in fundamental analysis, nor do I think that many technical indicators have any value. Most of them when tested over historical data have no statistical validity and the reason for this is that they are predictive and are attempting to predict the future, which as of now does not exist.
Where does that leave us then? If we conclude that we can’t use technical analysis or fundamental analysis with any consistent accuracy, what do we do? Well, the fact remains that the only indicator of any value is the price. The price tells you everything about a market and represents the sum total knowledge of all market participants in that particular market. Therefore, all the different trading and spread betting strategies that are of any use will be based on and built around the price.
The price is the indicator used in trend following and quite simply, you use the price to identify trends in the markets. As of now, the trends in most markets are down, be it stocks or commodities. This is true of both the long and short term trends.
Therefore, rather than trying to predict of guess where the bottom of the market is, traders should just notice that the markets are trending down and position themselves accordingly.
At LS Trader, our spread betting system identified that the stock markets were trending down again several weeks ago and we have been short ever since. Therefore, all our current spread betting strategies for stocks will be from the short side only. How long will this downtrend last? We don’t know, nor do we need to. We just ride the trend until we get confirmation that the trend has ended at which point we exit.
Will we get out at the bottom? No, because trend following does not set profit targets and exit trades when or if such targets are hit and it does not try to predict the bottom of the market. It leaves the trades open until the market reverses a bit and then exits. This means that we must necessarily give back a portion of our profits but this is necessary to give the trend the maximum chance to continue and enable us to extract as much as possible from the trend.
For us here in the UK, the market that we seem to be fascinated with most is the FTSE 100. As I have written previously, this market was headed towards 3500 and that was an intermediate target that we had identified. This week 3500 was taken out and the market drifted lower, although it has been higher since. Will it go lower again? Who knows?
One thing that we can do to give us some sort of indication as to where we think the market may go is to identify key support and resistance levels on the chart. Looking at the FTSE, we can identify 3277.5 as the bottom set back on the 12th March 2003. This was the level that the FTSE was at following the technology crash and this proved to be the bottom of that bear market.
If the market does fall again to test this level, one would expect major support and buying interest from bargain hunters. This level also represents a low set back in May 1995 and should represent major support. If this level fails then we may well see a swift decline further to around 3000. If this happens we will review things from there.
This is though as I have written above, all speculation as the future cannot be predicted and nobody can consistently call the bottom of the market except in hindsight and it’s equally possible that the lows set yesterday at 3464 (March contract) were the bottom of the market. Time will tell of course but the main point is don’t buy in to all these people trying to predict the bottom of the market because the fact remains nobody knows.
Good luck in your trading