What to do When Prices and Fundamentals Just Donít Add Up
Let’s apply this to the current macro backdrop. The outcome of the fiscal problem in the US – the expiry of $600bn of tax cuts and spending programmes in January 2013 – is unknown at this stage. The Presidential election in November complicates this matter even more as we don’t even know who will be in power when the US reaches the cliff edge. Hence no wonder markets appear to lack direction.
Right now there appears to be an even chance of either muddling through or going over the edge, which could plunge the US economy into recession. Stocks had a good rally over the summer months and yield is hard to find in the current economic environment of low interest rates, so people may be unwilling to give up on the equity market quite yet, even though there is this huge bout of uncertainty lurking on the not too distant horizon. If you short the market then you risk losing your capital, as the rest of the market may not move with you, if you go long you may be preparing yourself for a fall. So what should you do?
Instead of trading how about preparing a strategy? Some people tend to think that they have to trade all of the time and if they are not they are wasting time. I disagree. In an environment where the fundamentals don’t match up with the price action I would be lining up my leading indicators so I always have them in easy reach and doing my technical analysis. I want to find the current support and resistance levels that will essentially act as buy and sell signals that I need when I place trades in the future.
A trader’s fundamental analysis needs to be good in this game, but a precise trading strategy is key and that is where technical analysis comes in.
Kathleen Brooks can be contacted at Forex.com