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In contrast to some who focus exclusively on individual tools, such as technical analysis or fundamentals, I prefer to use multiple tools to try to determine where markets are headed. These tools include fundamentals, technical analysis, sentiment, Elliott Wave Theory, market positioning, and inter-market analysis. My greatest confidence in a trade or investment is when these tools all point in the same direction.
I am not going to explain how each of these tools work in detail, there is ample information on the internet for such research, but I will share the following…
Fundamentals – When I refer to fundamentals, I mean information or news that moves markets, which includes economic data, central bank policy, and geopolitical events. Such fundamentals are typically the catalysts for market moves one way or the other in the short term and form the basis for long-term market trends in my opinion. No analysis can ignore the fundamentals for long.
Technical Analysis and Elliott Wave Theory are wonderful compliments to fundamental analysis, especially with respect to the timing of trades and the confirmation of trends. Along with sentiment and positioning data, they can assist in explaining and anticipating market moves that defy traditional interpretation of fundamental data.
Sentiment data such as the AAII survey of equity bulls and bear, the Daily Sentiment Indices, and the Gold Miners Bullishness Index, are excellent contrarian indicators, especially at extremes. If everyone is bullish and buying, typically it is a good time to sell, and visa-versa for when everyone is bearish and selling.
Positioning data, such as that in the Commitment of Traders, or “COT” reports, is also very useful particularly at extremes. When hedge funds are especially long and commercial traders, the smart money, are extremely short, this suggests that the boat is loaded to the upside and we should be expecting a top in the underlying asset soon. You can see how this marries well with the sentiment data.
Lastly, inter-market analysis can be used when high correlations exist between one market and another. For instance, the performance of the dollar/yen exchange rate tends to mirror that of gold. Why is unclear, but for long periods of time, the two tend to be highly correlated. Determining the direction of dollar/yen will likely aid in determining the direction of gold, as long as the correlation holds.
By way of example for how these tools can work extremely well together, there were multiple signs of a pending bottom in the gold and gold miners late 2015 and early 2016. All of the tools above clearly indicated that an important bottom was being formed and that a significant rally would follow. Check it out yourself. Personally, I made significant returns on my investments in miners and metals post December 2015.
Please note that this system does not always work but I have found that it does increase the probability of optimizing the timing of trades and investments, especially at major peaks and troughs in the market. Feel free to share your methodologies with everyone on the site so that we can all benefit from sharing each other’s experience and insights. That’s what GPT is all about.
I hope that you find this site helpful and welcome any feedback to improve it.