Forex Investment and Currency Trading

There have been of the view for a number of weeks that the DJIA is trying to form a base off its 10 October low. It is time to revisit the picture and articulate how things look today. The reality is that on one side there are still some “glimmers of hope” while on the other side there are obvious reasons for concern.

• Fear is without doubt one of the strongest emotions in financial markets. That was particularly evident in the sharp fall seen between August and October 2008. The chart above shows that fall overlaid on the sharp fall seen between August and October 1987.
• A move of this magnitude over such a short period of time provides the elevated levels of volatility and fear that ensure (as we saw in both instances) that whatever happens thereafter price action is likely to be very volatile. Fear does not disappear easily once it takes hold and apart from price action time is an important component in alleviating fear.
• Despite the huge volatility we have seen there may be a glimmer of light in the fact that the present levels of the DJIA remain relatively unchanged from 6 weeks ago.
• In 1987 it was not until 45 days after the 19th/20th October collapse low (4th December) that we started to see a gradual climb into year-end resulting in an 18% rally over 1 month. This is the type of thing we need to see here. Sharp 2 and 3-day rallies of double digit percentages followed by sharp falls only serve to exacerbate the fear. A gradual climb would have the effect of
• Reducing fear
• Reducing volatility
• Allowing prices moving higher at a steady pace to encourage the “cash on the sidelines” to get involved
• Still hold out some hope that this could happen (We are 41 days since that low was put in on 10th October in the DJIA) but we are right on a knife-edge here. While fear rules the ability of this scenario to play out gets increasingly difficult. As FDR so eloquently put it “The only thing we have to fear is fear itself”. A weekly close below the 10 October 7,882 level would be of concern here and suggest lower levels still
  • What about volatility?