Sunday 20 March 2011

How will the market react to Libya?

Happy Weekend All,

The title of this post is somewhat misleading. My experience in the market has taught me that ultimately the market is going to do whatever it wants to do. Trying to predict the future course of events is often futile. The best we can do as traders is have a setup, wait for price action to confirm the technical picture, and then execute always keeping the risk/reward in our favour. This sounds simplistic but it is some of the best trading advice I can give.

The market is at a juncture here I believe where it could breakout from a base building process and go on to retest its previous highs. I have been showing how breadth figures have not been supporting the move lower thus setting up a classic divergence. Price has hit some great supports and bounced quite positively across several markets. Equally however, if last weeks supports break, a whole new range of possibilities presents themselves and we have to be flexible enough trade the new setups.

I don't know how markets will take the weekend intervention in Libya. On the one hand it could be perceived as a positive by the market as this will possibly lead to an end of Qaddafi and close the door on recent uncertainty. However, heightened tension and bombs dropping from the sky is hardly the ideal backdrop for a sustained rally. The options are numerous here. Thus I just don't know how the market will take this information and I don't pretend to. Price action as ever will be key. We have some great supports in the S&P500, ASX200 and AUD as shown below. If this is a new leg up, these levels will hold. An ideal bullish scenario would be a gap down with no follow through.