The underlying story for gold is not at all good. The big move in gold, the 12-year bull market, was underpinned first of all by general commodity bullishness and then by the mistaken belief that the U.S. Federal Reserve unconventional monetary programs were going to cause an inflation spike and hyperinflation in the U.S. and elsewhere. Even with soft data in recent weeks in the U.S. the recovery is intact and although patchy growth trends are emerging. Citigroup predicted that 2013 would be the year that “death bells ring” for the commodity super-cycle. 

During the great demand driven bull cycle for commodities growers and producers expanded production capacity to meet demand. Since demand is no nowhere near where it was pre GFC we have more capacity than we need. That capacity will be absorbed over time as the world settles in to a slower but more sustainable growth pattern.

If commodities are soft in the agriculture and non-agriculture sectors we should turn our attention to the financial sector. Stock indexes, currencies and bonds are attractive in this environment.

There are headwinds as the International Monetary Policy cut its outlook for global economic growth by 0.2% to 3.3%. The IMF also cites Europe's ongoing recession, dips in the U.S. economy and lower Chinese growth as weighing on the global economy. In the U.S., the institution points to the stringent new tax and budget cuts as a major impediment during an economic recovery. Meanwhile, the aggressive monetary policies in Japan have fuelled an economic turnaround in the region.

Price trends tend to perform better in low volatility environments and conversely when volatility is high, short-term traders become active. A low volatility environment allows trends to emerge.

It is possible that trends will emerge from the current bout of softness.
 

No method of picking winning trades is faultless. Of the two popular methods used, fundamental or technical analysis, the expectations on technical analysis are impossibly high. The name ‘technical analysis’ implies a sophisticated level of analysis, even scientific, yet technical analysis is not sophisticated. A better description of technical analysis is ‘charting’ and technical analysts are better referred to as ‘chartists’. We now use the term “quantitative analysis” and ‘quants’, further elevating the level of expectation. Have the best mathematicians found the Holy Grail of trading? It is still technical analysis or charting.

Technical analysts use a few measurements of price action, the open, high, low, close and volume, to produce a historical record of price activity and from those five pieces of information chartists invent more information and present it in the form of indicators. You have to tip your hat to the indicator inventors, there is some very clever work being done. But, does it offer anything of value to the trader?

Indicators invented by technical analysts can be valuable, although those indicators of value are very few and far between. A good test of an indicator is whether it produces profitable trading signals. Before using any indicator every trader should test it as a stand-alone trading system. If it doesn’t stack up, why use it? We know the usual response is that individual indicators should not be used in isolation. The advice given is to use combinations of indicators to confirm each other and to wait for the price action to confirm the signal or signals given by the indicators. What combinations? Which indicators should you use? Surely someone has found the perfect combination of price pattern and indicator(s), or combination of indicators by now! Given the power of technology why is it that no-one has produced the perfect, 100% indicator, or combination of indicators, that produce profits 100% of the time? Because at its heart, the modern complexity of technical analysis makes it open to interpretation.

We can show you beautiful equity curves derived from purely technical trading systems that are profitable (even after commissions paid), but you won’t like what you have to do to trade them in the real market.

We are going to demonstrate one in next Monday night’s webinar. To be invited to this webinar contact us here.

There is no doubting the fascination and allure of charting but the attraction is more than that. The love of technical analysis comes from the hope that it works; the potential of finding the one system that works all the time. Maybe one-day someone will.

There are some things charting gives traders they cannot get from anywhere else.  Technical analysis will draw you a picture of the collective psychology of the market, charts can be used to evaluate potential risk and reward, and charts are an indispensable tool for timing trade entries and exits.

Over time we have inflicted hard lessons on ourselves and learned that charting does not always fulfil its promise. We have learned it is better to build your trading activities around a combination fundamental and technical analysis rather than either in isolation.

Trading is not black and white. The balance is in the grey’s.

Australian 3-year bond yields have nearly crossed over the RBA cash rate. Bond traders are telling us they expect 3-year rates to be about the same in three years’ time and they are not factoring any more rate cuts by the RBA. This suggests there is upside risk for interest rates and downside risk for bonds.  Our rate of change model does not suggest it is time to give up equity holdings however if bond yields start to rise above normal parameters equity markets are likely to underperform other assets.

We hold the view that America will lead the rest of the world out of the GFC inspired recession. Europe and the U.K. are struggling, in fact the U.K. looks in worse shape than Europe, and China is having problems managing growth. Let's be blunt - we need America to recover.

The soft Chinese industrial production and retail sales figures stoked some concerns that the recent pick-up in the country's growth rate may have stalled. In addition, higher-than-expected inflation of 3.2% in February raised questions about the government's ability to do more to shore up the domestic economy.  While the February figure was distorted by Lunar New Year effects, consumer-price index inflation averaged 2.6% year-over-year for the first two months of the year, 0.5 percentage points higher than the fourth-quarter average, suggesting that underlying inflation pressure is building. This will gradually restrict policymakers’ room to manoeuvre.

That brings us back to America where we see evidence of a sustained recovery, but with risks. The U.S. remains a ‘bunker economy’ where evidence suggests it is time to come out of the bunker but no-one believes it. Time and positive data will change investor attitudes and we see the ‘bunker days’ as limited. Stronger retail sales reported for the month of February is further confirmation of a recovery underway in America.

Since crossing 14,000 the Dow Jones has held on to the breakout by creeping up day after day. We now have 10 days of closes above 14,000. Technically the Dow Jones is bullish; the market is taking out resistance levels and making new highs. It is the most obvious message a chart can give a trader. Confirmation by highly correlated markets is another strong message to traders but we haven't seen that yet. Although the Dow is making new highs, the S&P500 is not and until we see the S&P500 confirming the bullish Dow Jones move by making new all-time highs we will not feel 100% confident that broader sentiment is equally bullish.

Does all the good economic news and rising confidence equate to a strong U.S. stock market? The answer is “Yes, for now, but not for as long as many people think.” In the not too distant future investors will need to go against the majority to outperform. Timing is everything. When the market is attracting the last investors to the party it is time to be leaving.