What the shape of the recovery? A V-shaped recovery with rapid return to strong growth? An anemic sub-par recovery that is U-shaped? A double-dip W recession as a second wave emerges? An L-shaped depression in two years? See my broadcast today at http://NourielToday.com @ 10am
V-shaped rapid recovery
Anemic U-shaped recovery
Double-dip W recession
Future L-shape depression
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Above, a Tweet last week from Nouriel Roubini, one of the few economists I used to listen to; now he too is jumping on this silly bandwagon. As the Queen famously asked of the 2008 financial crisis (at the London School of Economics), ‘’why did no one see it coming?’’. What hope is there then of this lot spotting not only when the corner has turned, but how much momentum there’ll be in the next move?
These are the situations in which technical analysts excel.
First, they can see when a trend is mature and when it’s out of control. This is done via oscillators like Relative Strength Index, divergence and breadth od movement. This then prompts them to be on alert for special reversal chart patterns.
The best-known of these is probably the head and shoulders, which gives you one or more downside objectives; it’s inverse is just as applicable today. More interesting perhaps is the island reversal, where a market is already in free-fall, and on opening for trading the following day has so many sellers trying to dump the asset, that there are no trades between closing and opening prices. It continues on down for a day or seven, then re-thinks as suddenly a herd of buyers arrive, causing it to gap higher on opening. In a way this is a more dramatic version of the ‘head’. Fibonacci retracement measurements give you a good idea of how far things might go in the opposite direction.
Sometimes turns can be timed to the day. I surprised myself when, as gilt futures pit trader, I told my co-workers in the aisle of booths we had, that the bottom to gilt prices was ‘in’ (they had been slipping and sliding for years). It was a hammer on the daily chart, which then translated into a powerful bullish engulfing candle on the weekly and monthly charts. At market tops, this idea, and feel for the market, is known as a shooting star.
Foresight, timing plus targets gives you a huge edge. Use it!