I decided to write this article on the state of things as they currently stand and what I imagine will happen next in order to see how accurate my predictions are. It should be noted however that many of these predictions are based on fundamental analysis and I will not trade using fundamental analysis; I trade using 100% technical analysis only.
Technical analysis tells us what currently is happening, or what rather what has just happened. Trading based on what has just happened is, I believe, far more reliable than the predictions of economists using the fundamentals. Economics often has more in common with voodoo or astrology than it does with an actual science, especially when it's some market 'expert' being paid to tell others what's a good buy and what's not and it's not their money that's on the line. Some of these 'experts' are often deliberately vague, they continually point back to the few times when they were actually right (assuming that they even made a concrete testable prediction in the first place), whilst the times when they were wrong is brushed under the carpet or they included a get out clause in their article and therefore didn't really make any real concrete predictions in the first place. And remember, even a stopped clock is right twice a day.
When my money's on the line I'm more interested in going long if the market is going up and that's confirmed to me by, say, a new four month high for example, rather than some prediction that the market is going to make a new high soon based on an economist's interpretation of the fundamentals. This is because when a market's direction can be established it's more likely than not to continue moving in that direction for sometime than it is to change direction, this is why those who try and predict tops and bottoms are usually wrong. Nevertheless I thought writing my predictions for the medium term and reviewing how accurate they were a few months later could be fun.
Prediction I: The stock market 5th July – 2010,
Here is a chart of the daily closing price of the Dow Jones Industrial Average over 1 year. As any chartist will no doubt notice, a large head and shoulders pattern has just been completed and the neckline has broken. On Friday the index closed at 9,686.50. A head and shoulders pattern on a chart with a large time frame is a bearish reversal signal. People often tell me that events drive mood (mood being investor sentiment) and the markets. I think they're putting the cart before the horse on that one; mood drives events and mood drives the market. An index like the Dow Jones can therefore be said to be a graphical representation of investor mood (sentiment). A head and shoulders pattern tells me that the market made a high (the left shoulder) and then after falling back to hit an area of strong support (the neckline) the market rallied again to make a new high (the head). Then after making a new high and falling again to hit the same area of strong support the market rallies but not only fails to break the previous high (the head) it also fails to take out the high made before the previous high (the left shoulder). Once the upside has failed the market then has to fall below the neckline to make the pattern complete. After failing to make a high higher than the previous high, and the high before that, the strong support at the neckline also fails - the market has no where left to go from there on but down. Well, that's the theory at least!
A head and shoulders pattern can also often be confirmed by volume but I don't believe it has to be. Volume should be high when the left shoulder is made, moderate when the head is formed, and light when the right shoulder is formed, and then high once again once the neckline (the support) is broken. In other words volume should decrease at each rally then rapidly increase when the support is taken out – this indicates weakening conviction with each of the mini-rallies and lots of conviction on the downside.
After the neckline is broken in a head and shoulders pattern, the market typically falls from the neckline by the distance from the highest point of the head to the lowest point in the neckline. So I expect the Dow Jones to fall to about 8,500 as the distance from the highest point in the head to the neckline was about 1,250 points and the neckline was broken at round 9,750.
So, that's my first prediction, Dow to fall to around 8,500.
Prediction II: More Quantitative Easing in the USA,
Quantitative easing is the modern term for printing money, or creating money out of nothing (as opposed to creating money out of debt). In the USA it looks like quantitative easing is back on the agenda as the American economy appears to be faltering again. US unemployment is firm at almost 10%, new home sales are down to an all time low, and leading economic indicators have turned sour. I believe these conditions are merely the result of the previous economic stimulus wearing off. Unlike Europe's leading economies (Germany, France and the UK), America's solution to the previous stimulus wearing off is likely to be more stimulus (i.e. more government debt and quantitative easing). As the news reports put it after the latest G20 meeting: "Austerity in Europe, stimulus in America". European governments simply can't keep borrowing and printing money, unlike the Americans the Europeans don't have the luxury of having the world's reserve currency and both the Euro and the Great British Pound would be allowed to fail. Last time they printed money the stock market rallied as those who got the cash had to have somewhere to put it – this time I think some of it will flow into investments and stocks again. That's what I'd do if a helicopter dropped some cash over my house anyway, I wish it would ;)
So that's my 2nd prediction. More economic stimulus in the USA leading to an eventual recovery in the stock market.
Prediction III: The Euro, The Great British Pound & The US Dollar,
I'm currently feeling slightly bullish on both the Euro and the British Pound against the US Dollar (especially the Great British Pound). I haven't as yet had a strong technical signal, such as a close above a three month high, to confirm that the market is clearly moving up and is therefore likely to continue moving up for sometime which is how I normally trade, but I'm still more bullish than bearish on the Pound and the Euro vs. the US Dollar – I think it's more likely than not that the GBPUSD and EURUSD will rise in the coming months. There are two main reasons for me thinking this.
Firstly, retail trader sentiment seems to have shifted to being bearish on the GBPUSD and EURUSD and these traders are usually wrong. And secondly, as I mentioned in my 2nd prediction, I think we'll have austerity in Europe with governments raising taxes and cutting spending to pay back their national debts whilst in the USA more fiscal stimulus and printed money seems to be what is in store. During the last global financial crisis of 2008/2009 the US Dollar rose as banks were bailed out, money was printed and economies were stimulated by government debt, but I believe this time it will be different. During the last crisis the big money flowed into the US because that was where it would be protected as the US Dollar is a safe haven currency. During the optimism and investor confidence in 2006/2007 the US Dollar fell as money left the safe haven of the US to find greater returns abroad. And during the crisis of 2008/2009 the Dollar rose as the money flowed back to America as investors stopped being so worried about where they could find the highest returns and were more concerned with survival. As the world's largest economy and primary reserve currency, the US Dollar is (I believe) simply 'to big to fail'. During the Asian financial crisis in 1997 a number of small Asian countries were hung out to dry and left to the mercy of the markets, if a similar thing were to happen to the USA the America Dollar wouldn't be left to the mercy of the markets like that - other countries would step in and help prop it up. The rules of the global game would be changed to protect the Greenback – these problems are essentially created on paper and they would be solved on paper by changing the rules. To many countries depend on the US Dollar and there would be to much at risk not to change the rules. However, a double dip recession doesn't mean the global financial system will be threatened this time like it was in 2008 and 2009, if the global financial system isn't threatened I think the UK and the Euro zone countries paying back their debt whilst the USA prints even more money and borrows like there is no tomorrow will cause the Pound and the Euro rise against the Dollar – but like I said, all this hocus pocus isn't nearly as accurate as simply waiting for a clear technical signal that the market is going up and then going long. But nevertheless that's my prediction.
My third prediction: EURUSD and GBPUSD to rise, especially the latter.
My Financial Predictions In Summary,
I don't usually try to predict things. Instead of trying to predict what the market is going to do I like to just look at what the market currently is doing and bet on it continuing to do so – because it usually does for sometime, once a strong trend is underway it actually takes a lot to stop it.
Most analyst predictions based on their interpretation of the fundamentals are no more reliable than tossing a coin unless the events predicted are so bloody obviously going to happen that anyone could do it. But I thought it might be fun to make a few predictions of my own anyway and I intend to come back and look at them again in a few months to see how accurate I was. So my predictions, in summary –
Dow Jones falling to around 8,500.
Falling stock markets leading to more quantitative easing in North America, which eventually leads to a recovery in the stock markets.
The Euro and the British Pound to rise against the US Dollar.
