Investors are happy that the Dow gained 620 point today, August 26. They are hoping for market stabilization according to USA Today.
The Dow rebounded in a big way, surging nearly 620 points – its third-best daily point gain ever and best since 2008 – ending a painful six-session losing streak and giving Wall Street the signs of stabilization it craved.
After yesterday’s failed rebound that led to the sixth straight session of losses on Wall Street, investors Wednesday were searching for stock market stability and a lasting market rebound. And it got its wish.
Unlike Tuesday when the Dow let a 442-point gain disappear and finished down 205 points, the Dow rallied sharply into the close.
This is the sort of market that causes investors to have ulcers. But traders look for profits from an unstable market. When there is panic selling traders make money shorting stocks or picking up bargains on the rebound. Timing is the key. How do you make profits from an unstable market? There are fundamentals and technical cues to watch.
A Slowing Chinese Economy and Inflated Stock Market
The Shanghai market went up 150% in the twelve months before June of 2015. By all accounts it was overbought and set for a correction. On top of that was the fact that the Chinese economy was slowing more than the government admitted. Investors are concerned that the second largest economy in the world is in trouble and that the Chinese stock market is disconnected from reality. These warning fundamentals were great cues for traders to follow and position themselves to take advantage of the meltdown of the Chinese market and the repercussions recently felt across the world. CNN writes about how China’s economy is shaking markets.
The astonishing stock market gyrations over the last few days are closely linked to economic news coming out of China.
The importance of China for the global economy cannot be over-stated. First there is sheer size. China is the second largest economy in the world and a significant importer of commodities such as copper and oil.
Second, the world has come to expect Chinese economic growth rates of 10-12%, growth rates that have helped bolster the world economy especially during turbulent times in Europe and the U.S. But now Chinese growth is slowing, and there are significant concerns about the health of the Chinese financial system.
When the Chinese quit buying raw materials the effects are felt from Australia to Brazil. When the Chinese quit buying high end consumer products or technical equipment Japan, Germany, Taiwan, the USA and many others feel the pain. As this story unfolds profits from an unstable market will go to those who best understand the winners and losers of a Chinese economic downturn.
Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better trader or investor.
The basis of using technical analysis to gain profits from an unstable market is that price patterns in the market repeat themselves. By learning and using established technical signs a trader can gain profits, especially from an unstable market.