As we all know trading during the summer months has always been tricky with thin liquidity adding an extra layer of volatility, but yesterday’s Labor Day holiday usually marks the end of ‘jumpy prices’ and a return to more measured market movements. If you have been engaged with the markets this summer you will have experienced some very volatile sessions, particularly on days when any question of the FED tapering its bond buying programme was headline news.
The beginning of the end for QE matters, given that for the past five years, central banks, led by the FED have encouraged and engineered a rise in risky assets. And with QE suppressing interest rates (and volatility) traders and investors have duly obliged by buying such assets. However, a lack of clarity about tapering has led to uncertainty and a sharp sell off in emerging markets, with the forex markets leading the way and currencies such as the Brazilian Real, the Indonesian Rupiah, and the Indian Rupee all coming under extreme pressure.
One of the main beneficiaries of this volatility has been gold which has benefitted both from this market uncertainty and the prospect of higher inflation in the months and years to come. It is against this backdrop that September promises to be a pivotal period for the markets with this single policy decision likely to dominate all other possible flashpoints, including key economic data, yet another Washington budget battle, further stress across emerging markets and even military action in Syria.
For traders and investors the markets will be both a challenge and an opportunity but only IF we remember two golden rules. First, individual markets do not move in a vacuum. They are all inextricably linked in a complex and multi layered way. Risk is reflected in all instruments and in all asset classes, and understanding the fulcrum which balances risk and return is key. Secondly, there is only one way to forecast future market direction, and that is using the combined power of volume and price – what I refer to as Volume Price Analysis. Volume has been at the heart of my own trading, since I began almost seventeen years ago, and is an approach which can be applied to all markets and all instruments. Volume confirms price, and price confirms volume. They are the astral twins of the trading world – Gemini in action. In the next few months, volume is likely to be the ONLY indicator which will reveal the true nature of the future price behavior in these volatile and momentous months.
By Anna Coulling