Broad Market Review 1/19/2014

Let’s take a look at the market for the week of January 15, 2015.

Forecasting the market is not an exact science. We’ve been fortunate with our recent successes, but it’s impossible for anyone to be correct every time. Will this be the week that I’m wrong? Only time will tell.

Last Monday, I said we were going to move to the downside a bit. This week we want to look at a bullish engulfing candle. This is where you have a series of downward candles, then one upward bullish candle that engulfs the candle previous to it. (A harami candle is the opposite; it’s a downtrend series where one candle engulfs the candle that follows it.)

What to do with a bullish engulfing candle

Often, the best thing to do in this situation is to wait for confirmation. It may appear that the market is going to take an upward turn, but the best thing to do is to wait a day and see if we get confirmation on this bullish engulfing candle. If we do, then we’re likely in for an upswing. If it falls, then it’s hard to predict.

European Central Bank as a catalyst

Last week we discussed implementing some bearish trades in order to take advantage of any downward movement. This week I’m tempted to take my ball home and not play. The reason is that the European Central Bank is trying to steer the Euro away from deflation, so they want to pour about 500 billion Euros into it. If they do that, I can imagine we’ll see the market hop up a bit because Europe is a large part of the global economy. Read more about the European Central Bank’s activity here.

When good news is bad news

A jump in the market due to the European Central Bank’s attempts to avoid inflation is actually bad news. If they infuse this, it’s like medicine. It means the Euro is like a sick patient in intensive care.

Look at it this way: if your mom has just done a round of chemo, do we take that as good news or bad news? It’s good that she’s fighting cancer, but if your mom is having chemo I’m not going to congratulate you. I’m going to say, “That’s horrible news! Is she going to be okay?”

The market often gets excited about the “medicine” because there might be some relief, but it’s a sign that something is wrong.

Why I decided to take just one path

Lots of people will say, “Why don’t you straddle both sides?” My answer? The premium is already too high.

I’m waiting to see what the Euro does. If we get a confirmation on this bullish candle engulfing pattern and the European Central Bank decides to announce that they’re pouring 640 billion Euros, the market might be a bit challenging to call.

So I’m going to hang tight for a bit. Plenty of people get greedy and want to catch a potential upswing. I’m okay because I’ve caught several other good trades over the last 5 weeks. I’m fine if I don’t catch this one. Risk is related to control, and I cannot control what the European Central Bank is going to do. I’ll watch this carefully, but I won’t attempt to out-guess them. I don’t want to be wrong. We’ll wait and see where the market goes.