Monday, 17 October 2011

ASX 200 and EUR/USD both testing key trend lines

Today the ASX 200 is testing the down trend line from its April high, while the EUR/USD is testing the down trend line drawn from its 2008 high. I believe it is significant (for Australians at least) that these two trend line tests are happening in parallel today.

Why is the dual trend line test important? What's the connection? In my opinion, movements in the US dollar are currently the key driver of movements in stocks, commods, and obviously other currencies. The EUR/USD is the anti-US dollar, the ultimate undollar tradeable instrument. If you see an edge in stocks or commods, it pays to check that movements in the US dollar support that edge. A weaking EUR/USD would certainly support the case for a weakening ASX 200.

It's too early to say that the trend line tests are complete, but if both markets turn down from their trend lines, the dual test would add confidence to a near term bearish stance on both markets.

ASX 200 daily chart, including after hours trade.


EUR/USD weekly chart.

Crowds are mad

Most (all?) traders instinctively know that crowds are mad. We see it every time a bubble forms, or every time there's a crash. Now there's some proof from the laboratory. Here's an excerpt from an interesting article I read today at www.socionomics.net ...


Scottish journalist Charles MacKay got it right in 1841; crowds are mad. And now we have evidence from the laboratory: 

  • Groups in which individuals have no knowledge of others’ estimates have more diverse opinions and produce a wider range of responses that is more likely to include the correct answer.
  • Groups in which individuals have knowledge of others’ estimates have less diverse opinions and produce a narrower range of responses that is less likely to include the correct answer.
  • Most important, individuals in the second kind of group develop greater confidence in their estimates. They herd as a result.