Starting off with some % after the first trading week of January 2016 has finished ..
S&P 500: -5.96%
Nasdaq Comp: -7.26%
DAX -7,1 %
Well, what is there to say. The numbers above as well as the table to the left give a pretty good impression. Everybody noticed the volatile price action downwards during this week, the world indices are showing the worst start of any year since they’re being recorded. The losses are quite significant for just one week of trading with the Shanghai Shenzhen ranking #1 on the list of maximal losses, reaching -12% in just five trading days. It doesn’t look much better for the rest of the world either – 2016 doesn’t look too promising for all of the globe, judging by just this first week. Nobody knows what can happen in the next 12 months.
The table on the left gives an overview of the worst beginnings of a year in the last 100 years, already 2016 is #1 at the top of the list. As you can also observe in the table there are 25 years listed, 12 out of the 25 ended in the negative. About half managed to turn it around and finish the year off with profits. However, in the cases of 14 years the month still ended in the red zone. It makes sense, harsh market drops won’t be recovered in a matter of days… Taking a closer look at some of the world indices, we’ll quickly see that the downaction happening right now is severe, and may not be recovered as easily as it had been in some previous years.
The Dow Jones Index will serve as a representative example for many other indices, pretty much painting exactly the same picture. Even though this picture looks pretty dark right now, it is not unusual to see the market action that we’re seeing. Every market goes into correction mode, no market goes up forever without balancing the uptrend in the form of either an internal (smaller) or timeframe-appropriate (larger) correction. It seems like in this first week of January 2016, we are dealing with the latter, since the drops are so extensive and affect every single stock market around the globe. The previously ongoing up-trend that had started in 2009, right after western financial markets took another deep dive, had already been slowing down for quite some time, since mid-2014 to be exact. That is 1,5 years in which especially the US indices did go up, but the trend was of very choppy nature without a lot of steam to really send prices rallying. Instead they were bouncing back and forth, still making new highs (all time highs!), but at the same time they kept coming back into the balance zone (moving averages) and told the trendfollower that there is nothing the market provides in terms of stable and continuous trends. A massive divergence is forming at this point. Once this type of price action can be observed, it becomes more and more likely, that, eventually, markets will start to fall and thereby end the up-trend. Maybe in order to start a bear market, maybe to just go into temporary correction mode. You won’t know until it’s over, and so we don’t this time. However, fact is price made lower highs after finishing a smaller (internal) correction on this weekly timeframe after which a new ATH was established. Ever since then though it has been coming down, just recently hitting a new fractal sell signal. Before this valid entry into the market was triggered, a first corrective wave that was followed by a bullish market move that didn’t make a new high, occurred.
This seems all far away now that the first trading-week of the year has passed. In the Dow Jones Index there were two fractal sell signals at almost the exact same price level triggered this week to take care of the trendfollower not missing a major move to the downside. The divergence on the chart, the nature of the market during the end of the last up-trend and the short-signals themselves make the World Indice markets look very dark at this point. Charts of other representative underlyings leave us with the same conclusion as the Dow Jones chart. Interesting to note though, is that in this sharp and rapidly occurring move to the downside, momentum didn’t have a chance yet to go below 0 in some of these charts! This could indicate that most of the pressure isn’t even here yet, possibly resulting in a continously dropping market, that may not even be best characterized as Crash, but rather as an extensive and long-lasting Bear Market.
You can read a lot about the reasons why this is happening – China, Russia, Iran, Interest Rate Hikes .. but what does it matter? As a professional speculator we’re not much interested in the Why of a market movement, we are interested in How to trade any market movement in order to profit from it. That’s also why my focus is not just on Indice markets, but spread out over different asset classes that have enough volume to move smoothly, in order to diversify the risk on the trading account. When paying attention to the risk factor, which a responsible and disciplined trader always does, there is no market movement in the world, that could harm his account in a way that he is out of the game tomorrow. Therefore, even the harsh market drops described above do not even have a negative effect on equity, they rather increase the account-size. This is simply because the trading system will provide entry signals (usually breakouts) into any major market movement – up or down, which leads to not being left out during even the worst first trading week since Indice markets’ data is recorded. Fractal sell signals as marked in the charts took care of having sell stop orders in place before the actual downaction started to get really intense. At the end of this week, simply by following the trading system, the trendfollower’s trading account can be up quite significantly considering the short amount of time.
However, this is also due to the engagements in other markets. Whatever the reason for global markets to turn negative in the beginning of 2016 may be, it seems like a lot of other type of markets are affected by the downturn as well. I have only selected two examples that show the diversity of markets that were hit, but there are many more. And in all of them you could take a position, with the appropriate risk factor, to profit from these drops.
With these impressions .. Happy Trading in 2016, let’s hope for many lasting trends!