Regular readers of this column will know that I have aired my concerns on the recent market run-ups, and was looking for a fall in the Dow, FTSE, DAX and others, back to their 200-day moving averages. Just to recap, when a market moves way above its 200-day moving average and stays above for some months, it normally sets my alarm bells ringing, as it either means the market will go sideways and allow the moving average to catch up, or it will drop down to meet the moving average. We now know that dropdown has been the case.
The levels I expect markets to reach are: Dow Jones 11,800; FTSE 6,000; DAX 6150; Hang Seng 18,000. It is interesting that the FTSE 100 has the least to fall, partly as it did not rise as much as the other indices; but it is still too early to buy it back.
Of course, this doesn't mean that once the major indices hit their 200-day moving averages all will be well - that would be far too easy. In many cases the crowd will overreact; so in the same way that we went from being so far above the moving average, we could easily stay below it for at least six to seven months. We could fall another ten per cent below the moving average before we start to consolidate, go into a sideways range and then move higher towards the end of 2007.
While some of the media may label the recent moves as a 'crash', I assure you that what we have seen so far is nothing like a crash: all we have seen is some of the large recent gains being given back. Even in China, which has seen massive speculation, the ishares FTSE/Xinhua China 25 Index Fund is still above its 200-day moving average and is up 30 per cent since this time last year.
If you are looking to take a view up or down on China then you can spread bet the FXI, which is the China ishares tracking stock. The share is priced in US dollars, but you can bet in pounds per point - charts of the index can be found online, and it is also carried within charting software such as Sharescope.
As far as I can see, no serious damage has been done to this market yet. My call here is a trading range between $85 and $105, which could last for some months. Beware, though: after this backing and filling, the next move will be a big one; and I am inclined to bet that it's going to be another down move. This could be in September, so be careful about being too bearish.
I would say that this is a cold, not flu. However, next time the markets may not be lucky enough to escape with just a few coughs and sneezes. The famous speculator Jesse Livermore once said: 'There is nothing new on Wall Street or in stock speculation. What has happened in the past will happen again and again: this is because human nature does not change, and it is human nature that always gets in the way of human intelligence. Of this I am sure'. Maybe all those new traders in China should take note and read a few history books.
Nothing has changed in my view on gold; I am still bullish, and see higher prices in current months. Of course, it has had a strong run and a small period of consolidation is due here; but I really don't see prices going below $600 and I am looking for $800 an ounce to be reached before the end of the year. With all the recent volatility, gold has held up extremely well. Some traders may have expected it to have rallied on the recent stockmarket falls - this would have been the case some years ago, as money would have moved into gold for safety. Banks and fund managers now have more sophisticated ways to manage downside risk, such as futures and options, so you don't see the same big rush into gold. However, it still does have a defensive nature.
Silver also continues to look extremely strong, and I am still looking for $15 to be broken in the coming months. If you look at the various sell-offs, the long-term trend remains up; and silver quickly bounces back over its 200-day moving average.
That's it for this time - have a successful trading month.
YOU SHOULDN'T SPEND MORE THAN GBP500 TO ATTEND A WORKSHOP OR SEMINAR NOT EVEN IF THEY PROMISE YOU GOLD FOR ATTENDING
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