More downward pressure to come?

The US stock market closed remarkably lower last night, due to weak retail data and what has been referred to as a "lending crisis". Have we seen the dead cat bounce, with more downward movement to come on world markets?

During the first market sell off a couple of weeks ago, I saw an interesting chart presented by Alan Kohler. He plotted the Dow Jones Index over the last 3 years. What he showed was a tight trading range, which has been broken in the last 3 months of the current bull run.


I have attempted to replicate the diagram, using the Australian All Ordinaries Index. As it can be seen, this trading range has rarely been broken within the last 3 years, and when it has been broken, it hasn't taken long to correct itself.

What this indicates, is that we may see more downward movement, possibly down as low as 5,400 points. If the uptrend for the last week continues, it may spell the end of the current trading range. I think not however.

Expect to see more red today, an possible more red in the coming weeks!

It's all about time in the market AND timing the market

If you've seen a Financial Planner you are likely to have heard this one: "It's about time in the market, not timing the market". Basically this means don't worry about what the market is priced at, if its over or underpriced. This doesn't matter. Just get your money in the market for the long term and over time you will be better off than those who trade in and out trying to pick "peaks" and "troughs" in the market.

This definitely makes sense, as who can tell when the right time to invest is?

However, I have recently, as part of a Post Graduate Diploma, studied Technical Analysis. When I told my colleagues I was taking on this subject, they laughed at me. Technical Analysis goes against all the fundamentals that as a Financial Planner and Economist I should believe in. At university they talk about it like it's a black art of some sort . However, I've always been interested in charting and wanted to better understand how to analyse charts, so took on this course.

For the uninitiated, Technical Analysis involves examining price action to determine changes in the supply and demand balance. In other words, using charts to determine whether to buy or sell securities. A common misunderstanding is Technical Analysis uses past prices to predict future prices. There's definitely more to Technical Analysis than this, with Behavioural Finance a major factor in Technical Analysis.

My growing understanding of Technical Analysis, has led me to believe that Technical Analysis can be used to "Time the Market". It's definitely not foolproof, but if you pick the right triggers, you can use Technical Analysis as well as Fundamentals to invest. For example, lets say I like the fundamentals of BHP and want to buy them for the long term. I can undertake some Technical Analysis and decide that I think in the next month it will fall by 10%. Then wait around and get in at a discount to what I would get in otherwise. Obviously I could be wrong and it never reaches the low that I predict, but that's the risk you take.

I remember a client last year decided to invest $500,000 in Australian Share managed funds through his margin loan. This was in early May, 2006. If you think back a while you might remember a correction of around 10% soon after this. So within a matter of weeks, this guy's portfolio was now worth around $450,000. Now, assuming a return of 10% per annum, over 10 years, the portfolio invested prior to the correction would be worth $1,167,184, a gain of $667,184 over the period. If he had of waited a month or so, the portfolio would be worth $1,296,871, an increase of $796,871 over the period. This is a net gain of $129,687 more than the other strategy.

An extra 20% return just to pick the right time to enter the market? I'll take that thankyou!