Technicals Weekly by Lloyds TSB

There is much debate about what is driving the markets at the moment and the consensus view is sentiment. In my view sentiment always drives the market; it’s just when the markets are in a state where prices are peceived as not reflecting the underlying ‘fundamentals,’ valuation techniques are thrown out of the window.

There is much debate about what is driving the markets at the moment and the consensus view is sentiment. In my view sentiment always drives the market; it’s just when the markets are in a state where prices are peceived as not reflecting the underlying ‘fundamentals,’ valuation techniques are thrown out of the window. Your view of this will obviously vary depending on your chosen discipline, but the nature of the imperfections of price against fundamentals due to human behavioural characteristics has always been at the heart of technical analysis.

For this reason when sentiment has swung too far, you may not necessarily see a technical signal, but the risk reward favours going against the trend- the so called “contrary opinion” trade. How you define too far again depends on a number of factors. I have been an equity bear for 14 months, but it is interesting that the market now refuses even to consider the prospects of good news. At present the dow is still off its intra-day lows of 10th October, arguably formed in a state of complete panic and implying there is now some tentative base building going on in equities. How far this can be sustained remains to be seen, but whilst I remain a long term bear, there is an argument to attempt to pick a reversal in commodities, commodity currencies and a reversal of the yen and dollar’s safe haven status from a short term perspective.

Emerging markets have come back from the brink and, whilst there is still a case for selectivity, it is clear that long term players will be eyeing the moves as a potential opportunity once the memories of panic have faded. Whilst high volatility does represent high opportunities, it also represents high risk, hence the time frame for trading has never been so crucial. However, the strategy for this is week is try and play the reversal scenario, with a close eye on
the exits if the markets start unwinding aggressively again.

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