Despite the positive remarks many analysts have made over this past few weeks as regards a possible recovery being in sight the markets as yet have not really responded. In fact the
FTSE 100 has been into spring hibernation, not moving much in any direction. The Dow has moved, not upwards but rather it has fallen lower.
Hardly what one would expect if the remarks many analysts have been making are to be believed. I have often said, the FTSE index from a traders point of view in recent times moves so little, that it is not worth trading. Having said that there are enough trading opportunities when trading individual shares or even the share sectors (that at least two of the spread betting indexes now offer) that one does not really need to be compelled to trade the index itself.
I have already said that the FTSE has been pretty static and although the Dow has moved downwards, there is no sign of any kind of trend. All the major indexes are what in the trade is called ‘range trading’. Another notable fact is that option volatilities in the majority of shares are at exceptionally low levels. One might ask what does this mean?
No buy until 5250
In recent history low volatilities have often been followed by sharp sell-offs, pushing volatility up again. Indeed the last sustained rally after a period of low volatility was way back in November 1998. Therefore based on these facts one could assume the markets are going to break to the downside. However, to take this view blindly on the back of this statistic would be very wrong. It could be an occasion when there is going to be a sustained rally, just like November 1998.
The only way to know is by being able to read price action and follow what it is saying. None the less, from a traders point of view, knowing that a period of low volatility usually indicates a higher probability of a downside move compared to an upside move can make one a little more alert to the fact that any rally should be treated with caution.
Yesterday the markets took a dip to the downside. The weakness in America has been due mainly to the fact that IBM has issued a warning over its first quarter earnings. This in turn has had a knock on effect on similar sector stocks. The FTSE has also followed the direction that America is presently taking closing with the sellers firmly in control at 5178. There would appear to be no obvious buy on the FTSE until such times as 5250 is broken to the upside.
Positive note for bulls
On a positive note for all you bulls. I do presently notice some weakening momentum in this current downside move, especially in the Dow in particular. This could be a sign that the sellers are beginning to run out of steam - at least in the short-term.
Ian Foster is a full time trader and director of “STB Trading”, a company specialising in training seminars for the private investor/trader who wishes to learn how to trade the financial markets successfully. He has been trading the markets for over ten years and on a full time basis for the past 5 years. Foster writes his columns from a personal view. At the moment of publication Foster did not hold any position in the above mentioned shares however positions can change at any moment. The information in this column is not meant as professional investment advice or as advice to do certain investments. Your feedback is welcome at ian@citycomment.co.uk.
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