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Yesterday’s decline was the largest so far. When a crash is underway nothing will stop it. Even when the indicators are oversold the market will go down and the indicators will become more oversold. For those who were not around in 2000 and 2007, this is what a bear market looks like. The decline is fast, the market can lose six months of gains in a few days.
Obviously in this environment it is difficult to trade with a stop loss. The FTSE 100 can move 100-200 points in a matter of hours. The stop loss is likely to be hit as a result of the increase in volatility. You really need a wide stop loss to make money in this situation. If you are a day trader with a tight stop loss, you are nearly guaranteed to lose. The best strategy in this situation is to use options (calls and puts), as there is no stop loss with options and the maximum loss is limited to the option price. I have been successful trading options and you can follow my trades on the Better Trader Premium website.
The collapse in global stock markets in the last few days has probably postponed any rise in US interest rates to next year. Now you would think that is good news for the market. Not at all, sentiment is bearish and in this situation good news is seen as bad news. Investors are not focusing on lower interest rates, they are focusing of the global slowdown. In my view and if I am right on the direction of the stock market, US interest rates won’t rise for a long time. This bear market is in its infancy, the slide will extend into next year. By the time the bear market is over, the FTSE will be near 4000, the S&P will be near 900. The intensity of the sell off will push the economy into contraction, inflation will be negative.
The belief that interest rates won’t rise will create a rally, this rally will be a dead cat bounce. Any move up will provide an opportunity to go short for the next move down. I think wave iii (circle) ended yesterday at 5768 or nearly 15% below the top of wave ii (circle). An incredible drop in less than three weeks. This third wave inside wave 3 is a third of a third which is the most powerful wave in a sequence. The current bounce is wave iv (circle), this move has the potential to end near 6150 due to the increase in volatility but longer term the FTSE 100 should make new lows.
Thierry Laduguie is Trading Strategist at www.bettertrader.co.uk
In my opinion this is a load of bollocks. Typical scaremongering. Yes there will be volatility and we probably haven’t found the bottom but if this were real crash material the Dow wouldn’t have reversed 1000 points up after being 1200 down. We do need to be careful but to talk of 4000 for FTSE is ridiculous, the UK is already getting on the cheap side so 4000 would put P/E on 10 times if FTSE fell there. This is where chartism gets out of hand, yes we have had a fright but these doom mongers get carried away with all this