Our thing is day trading—holding as necessary out to a couple of days. We trade currency pairings both long and short. We read the markets price action—the value, setup and signal. We do this technically, which means we read a chart and without the undue concern about fundamentals.
However, you also have money in medium-term funds. Al Brooks is an exceptional short term trader and teacher. Those abilities have technical relevance in all timeframes. Here is what Al says about the medium term. It relates to the S&P 500, but as we have noted before, all markets in some way or other will follow the S&P—often much slower if it’s good news, but much quicker if it’s terrible.
With interest rates at or approaching zero, you may be thinking that the medium-term share/stock market is the only option. Maybe, but I’m content taking the short term technical view. Below explains why.
How far will the stock market fall?
The pandemic will lead to unemployment comparable to the Great Depression that started in 1929. The stock market fell almost 90% from its peak in the 1930s. Why is the market rallying so strongly when the unemployment and GDP now are the worst since the Great Depression?
One reason is that we now have a Fed; brilliant, bold people who have learned from the past. The Fed Governors have said that they will effectively create infinite dollars to prevent the destruction of the economy. Investors see that as the Fed placing a floor under the market.
I think investors and traders are getting this wrong. The market is down only 10 – 20%. The Fed’s floor would be around 50-60% down from the high. There have been many selloffs in that range since the Depression, and we completely recovered each time. I, therefore, think that the Fed’s real floor will be about 50 – 60% down from the high. The market is up in part, simply because investors believe there is a floor somewhere.
We live in a country (US) with a relatively free market. The Fed wants it to stay that way. They, therefore, will not intervene as quickly as many investors hope.
Investors and traders who are buying at the current price think they are buying just above the Fed’s floor. They are not. The base is far below, and these traders will discover that the support that they expected is not where they assumed it would be.
The rally is technical.
So why is the market rallying so strongly? The pandemic (we assume) is not going to be as bad as the bubonic plague in Europe in the 1300s. Also, institutions love what the Fed is doing.
These are both necessary for the rally, but the sine qua non is the technical or chart pattern.
The market is merely repeating a behaviour that it has done thousands of times on all time-frames. It is no more complicated than that. Experienced chart readers know that, and they are trading with that expectation.
The stock market probably would not be able to do it as strongly as it has without the (good) news about the pandemic and the Fed. However, that technical pattern merely is unfolding as it usually does.
Traders and investors should soon expect a test back down, and then a trading range. That range will be a continuation of the last 30-month trading range, and it will probably last all year.