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Ten fair market indicators, one must know

Updated on November 30, 2011

Technical tools

There are various indicators such as the Relative Strength Index (“RSI”), the Moving Average Convergence-Divergence (“MACD”), the Commodity Channel Index (“CCI”) and the slow stochastic. However, market “indicators” are different from conventional technical “tools”. The purpose of this article is to clarify what is a market “indicator” and highlight the difference between the two types.

Technical tools

These indicators replicate the price’s pattern of a financial asset. They reflect bullish or bearish warning to both day and swing traders. “Traders” can choose their settings, and interpret these warnings. Such tools also provide direct or indirect signals. For all indirect signals, traders will wait for confirmation before taking the “trade”. A false warning occurs when the price denies the warning. False bullish or bearish divergences are unfounded warnings. Though false warnings do happen, one can easily learn to filter them out successfully. Technical tools are invaluable for analyzing independent financial instrument. Nevertheless, they are less useful for an excellent “market watch”.

The market

The market

Traders or investors are trading the market first, before any financial assets. It does not matter whether it is a stock, a commodity, or a currency. Traders and investors will always evaluate both technically and fundamentally the market, before making a decision. A positively correlated sector to the market may be booming when the market is exhibiting weaknesses. However, it will gradually be affected by the bearish market. Conversely, a positively correlated sector in a down course will benefit from a positive market.

The first strategy is to examine the market and appropriate trading or investment strategies that align with the current market’s conditions. Quite often, many investors ignore the market and only focus on the financial resource itself. In 2007, the market was overbought and weaknesses were evident. However; the property sector was booming. Those who fail to analyse the market first, made the right decision, to invest in the sector, but at the wrong time. As the market continues to decline, all positively correlated sectors succumb to the bearish momentum. One can achieve a complete market watch if one combines the trading triangle with the six critical price levels. On one hand, when a positively correlated asset is overbought, on the other hand, a negatively correlated asset will be oversold. A negatively correlated asset to the market is gold. At each time that, the market is going up, gold will be declining. However, there are times when these divergences do not happen. Each time that, one is watching the market, one should always distinguish between the reality of the market and the theory. The ability to recognize and evaluate flawlessly market’s reality is the key to a successful investment.

Real market indicators

There are ten market benchmarks; these are

1/ the FTSE 100 index in the United Kingdom (UK),

2/ the CAC 40 index in France,

3/ the Dax 30 index in Germany,

4/ the Nasdaq 100 index in the United States of America (USA),

5/ the Dow 30 index in the United States of America (USA),

6/ the Nikkei 225 index in Japan,

7/ Gold,

8/ Crude oil,

9/ the Euro-Dollar currency pair (EURUSD),

10/ and the Dollar-Yen currency pair (USDJPY).

All real market benchmarks, allow traders and investors to assess the market (S&P 500) and to recognize the beginning and end of market’s cycles. Every market indicator moves in tandem with “the market”, except gold and the Dollar-Yen currency pair. They also consider general micro and macro economic strength. They are also useful for detecting prominent market reversal or an oversold or overbought market. The best warning takes place when there is a sudden divergence between two or more market indicators that are positively correlated. Each time that, two diverging indicators such gold, and the Nikkei 225 are converging, investors should pay attention to the fundamentals, as this may represent a clear shift in the current cycle. These precursors’ warnings allow prudent investors to protect their gains or divest entirely at an opportune time.

The role of these indicators is exponentially crucial when the market is the fifth “Elliott wave” or after a sharp correction. Contrary to the technical “tools”, it is possible to compare a market indicator to another. One can compare gold to crude oil or Dow 30 index to gold. These comparisons allow investors to spot market’s manipulations, distortions, and are prepared before the music changes. They are also perfect timing tools that can assist investors in timing their investment. The general investment error is to buy or sell at the wrong time. The key is to determine the start a new a cycle or the end of a cycle. The worst option would be to buy at the top the market, or sell at the bottom. Many investors who fail to understand these market indicators are likely to exit the market at each time that, it is about to recover and vice versa. With the emergence of much modern charting software, it is now easy to monitor and compare those indicators.

Apart from the ten market indicators, investors do use copper, sugar, and silver as market indicators. By relying on various indicators, investors can enter and exit the market. One thing that remains in place is all “indicator” give warnings, but warnings are not "signals". Therefore, it is essential that investors and traders learn to recognize the market pattern, and examine their tools, to make profitable decisions.

The market is global; likewise, market indicators are global trading and investing “tools”. However, no “tools” can replace an investor. Investors and traders must continue to equip themselves with the best knowledge and skills, to understand “the market” and manage their portfolio profitably. One must always manage risk and simulate the stress test at all times. Finally, traders ought to use the five per cent money management rules and utilize stop loss in all trades. This article is for “educational” purposes only


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