Lessons from the Pros

Featured Article

Looking Back and the Road Ahead

By the time you read this article, we will have started the New Year. I hope you had a great holiday season and wish you a safe and prosperous new year. Looking back at the markets in 2011, we had a lost year for investors as the markets seem to be closing out the year at the same levels they opened it.

bwendell 20120103 - spx-2011-weeklyFigure 1

While traders had to adjust their focus to a choppy, highly volatile market, they still had great opportunities to profit that should continue into 2012. Just remember to reduce your risk when the markets become more dangerous. We can do this by reducing the number of trades we take, the duration of the trade or even the share size. By balancing those three factors, we can trade and profit while protecting ourselves from large losses.

So where do we go from here? Well, the world economic and political climate is still uncertain. Even the BRIC nations are starting to bow to the pressure. One of India’s richest businessmen, Ajay Piramal, stated that while he would like to invest in India, the corruption and red tape is preventing him from doing so and he will look elsewhere to build his factories that would have created many new jobs and revenue.

Aside from the fundamental reasons, let’s look to the charts to see what they are telling us about the prospects for 2012. The strongest index of 2011 was the Dow. I use a percentage change comparison chart to find the leading and lagging indexes so that I can watch for turning signals from the leaders. This usually precedes a broad market reversal.

bwendell 20120103 - index-percentFigure 2

The Dow is trying to move higher and retest the supply zone at 12,700-13,200. This level has been tested before and is obviously weaker. The stronger zone is slightly higher. However, since the Dow is dragging the other indexes with it, it may not have the strength to break that weekly supply in 2012.

bwendell 20120103 - dow-2011-levelsFigure 3

There is a troubling chart pattern on the Nasdaq as well. The tech index seems to be forming a triangle pattern while the Dow was strong. Traders and investors get frustrated with the lack of progress in the trend and prices consolidate as lighter trading occurs. The fact that this is happening while the Dow is strong shows a lack of interest in tech and retail stocks which are usually bought if investors believe in strength in the economy. Eventually, investors panic and exit positions causing the breakdown and reversal of the bullish trend.

bwendell 20120103 india - nasdaq-triangleFigure 4

And of course everyone wants to know about the shiny yellow metal gold. We had quite a run for gold as it was used as a safe haven from the Euro worries. But looking at the chart, we may be in for a serious correction or reversal. There is a lack of volume in the recent peak and a double top is threatening the long term bullish trend. Should that break, then the bears will take over and gold will drop along with many other commodities.

bwendell 20120103 - gold-2011-topFigure 5

Only time will tell if my analysis is correct, but there doesn’t seem to be anything fundamentally or technically to indicate otherwise. So 2012 looks to be ushering in the roaring bear. That will be great for the educated trader but wreak havoc for the unaware investor. Until next time, trade safe and trade well.

– Brandon Wendell bwendell@tradingacademy.com

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.