Unpredictability makes human beings uncomfortable. It is the element of unknown/unpleasant surprises that often throws us off our game. You must’ve noticed different types of people around you. Some who react to everything, some who react to nothing, and some who have learnt to react in a manner that’s better for them.
We would obviously be delighted if we knew how the market was panning out in order to prepare accordingly. But thank God for small mercies, we can’t see the future! What we can work on, however, is how we react to the developing trends.
Technical Analysis in that regard focuses on risk management. It hardly matters where the market is headed, you must have a risk management strategy in place. When you think about it, TA is really about your reaction to the price. Sure, we look out for the highest probability scenarios that could play out, but nobody can say with certainty what will happen next. It is therefore extremely important that our emotions remain neutral in times of changing market sentiment.
Market sentiment is a funny thing though. It moves in a unique fashion and generally takes people by surprise. But if you’re keeping track of all your parameters, you should be able to see signs early on. Since the beginning of the year, the market has been in a downward spiral in one form or another. There were bouts of strength coming through, but those were lone fighters that were holding their fort.
But in the month gone by, we saw Global market indices making higher highs and higher lows as the market witnessed a recovery. Even Small caps are now joining the move! This has come after weeks and months of diminishing momentum and strength. This has also come on the back of the correction in the greenback. So, obviously it feels like people are out on a celebration again! There are more mentions now of breakouts, breadth improvement, relative strength, and an increased market participation to back that up.
In my process that I follow, I noticed that I was suddenly using bullish terminology in my research notes. That was a minor signal for me. Look out for these signs and you’ll find that you have little warning bells too! But keep in mind, these are minor changes in the trend. It’s not a bull market yet.
Trends change little by little and then all at once. If you can track the ‘little by little’ part of it, then the market is your playground. If you haven’t reached that stage yet, keep working on it! Contrary to popular belief, this is not rocket science.
Thankfully for us, the market gives us an opportunity to learn every single day! Let’s take advantage of that!
Until we read again, Think Technical!
Rashmi Bhatnagar, CMT
Editor