What this post will concentrate on is how the market maneuvers trend changes. There have always been different forces maneuvering within the market, and some of these maneuvers can alter the short term price movement but they cannot alter the longer term price direction. The longer term price movement will always base on fundamental factors that are related to economic activities and asset values. The market will move accordingly to the expansion and the contraction of economic activities, and similarly to undervalued and overvalued assets.
To some observers, the price movement within the market appears to be random. But if one studies the price movement closely, one will find that there are repeatable maneuvers the market goes through when it is ready to make a trend change. No matter how external forces attempt to maneuver the market, the market will march through its progression to go from one major price trend to another. On September 19, 2014 the market has completed one of its maneuvers to transit itself from a long rising trend into a declining trend.
And in one of the shortest major trend reversal in history, the market again has completed one of its maneuvers on October 16, 2014 when the DJIA made an intermediate term low. Eleven days after the 10/16/2014 intermediate term low, the DJIA gained 1267.86 or 7.87% on a closing basis. It is unusual for the market to attain this magnitude of gains in such a short period without external forces maneuvering the market. The market could also be entering the euphoric or climactic phase of an extended rising trend.
Whether or not there are external forces maneuvering the recent rally, the market will prevail by executing one of its own maneuvers to steer the price into its longer term trend. From the following charts, one can see the maneuver that lead the market into a declining trend immediately after the DJIA record closing high on 9/19/2014. At the present state of the market, that same maneuver leading to the 9/19/2014 turning point is being executed. The market will go into another downtrend after the market has completed the progression.
DJIA:
(click on the chart to enlarge)
DJT:
SPX:
How long will it take for the market to complete this progression and how high will the market go before it reaches the next turning point? The answer to this question is depended on the external forces that are currently in play. Some of these external forces could be the central banks such as the Federal Reserve (FED), the Bank of Japan (BOJ) and the European Central Banks (ECB). When the market has absorbed the external forces and completed its progression, the turning point will appear and the trend will change. After the trend has changed, another set of external forces will enter the market trying to maneuver it once again.
There will always be external forces attempting to maneuver the trend of the market, but these external forces can only temporarily alter the price movement. The longer term price movement is dictated by more than just liquidity. The factors that move the market will always be economic and asset valuation related, not financial engineering by the central banks or by corporations.
The market is a leading economic indicator (LEI). A leading economic indicator is a forecasting tool that typically tries to project future economic activities 6-9 months from the present. Therefore, a simple injection of liquidity into the market or expansion of credits will not change the state of the economy if neither of these factors creates a demand for money to expand or to start a business that will lead to increasing economic activities. No matter what factors are driving the market, if one learned to monitor the market’s maneuvers, then one can be better prepare for the turning point and be positioned properly for the impending new trend.
The market does look as it is entering a euphoric phase and huge price movement can be tempting. It is very important not to get caught up with the quick and huge upward price move as the blow-off can appear suddenly and when least expected. Trade defensively and now is not the time to be greedy!
