Technical analysis indicators; Change is in the Air

Deciphering the Value of Technical Analysis Indicators: Useful or Useless?

Updated Sep 26, 2024

Technical analysis indicators are not foolproof and can lose effectiveness as market conditions change. It’s essential to constantly monitor and evaluate their efficacy to ensure they still provide accurate signals. When an indicator is no longer functional, adapting and finding new tools that are more relevant to the current market environment is essential.

Let’s delve into the historical perspective of the Baltic Dry Index (BDI) from 2011 to 2015 and then examine its current state. The chart below shows that the BDI experienced a consistent downtrend during that period, signalling underlying issues. However, despite the BDI’s inability to surpass even 50% of its peak in May 2008, around 11,800 points, the stock market continued its upward trajectory. This discrepancy made some dismiss the BDI as ineffective or irrelevant, as it failed to provide accurate results.

This claim holds to some extent. However, a deeper analysis reveals that the reason for the BDI’s failure lay in the Federal Reserve’s manipulation of the markets through the infusion of cheap money. By flooding the markets with virtually unlimited funds, the Fed could circumvent the BDI’s influence. Consequently, any indicator can be rendered useless in such substantial hot money inflows. It is worth noting that the Fed possesses access to an unlimited supply of funds.

Navigating the Baltic Dry Index (BDI)

The Baltic Dry Index (BDI), a key indicator of global economic health, currently trades at a staggering 90% below its peak in 2008. This significant decline suggests clear signs of financial distress, presenting challenges for the Federal Reserve to inject liquidity into the markets while combating inflation. The BDI’s message points to a weak global economy, prompting the need for the Fed to intervene by flooding the markets with money.

However, a contrarian perspective, incorporating the principles of Mass Psychology, reveals a potentially positive outlook. Mass Psychology suggests that one should consider taking actions opposite to the majority, especially when the prevailing sentiment aligns with one’s action. In this case, the BDI’s dire outlook aligns with Mass Psychology, indicating a potential contrarian opportunity.

It is important to note that the Fed’s policies since 2015 have limited the BDI’s efficacy as an indicator. Nevertheless, the data can still be utilized contrarily to strategize accordingly. This implies that any market sell-off should be embraced rather than feared, as it may present unique investment prospects.

As of June 2024, the BDI is starting to show signs of life. If it closes at or above 3,400, it will pave the way for a test of the 4,800 to 5,100 range. This development bodes well for dry bulk shipping stocks like CMRE, which are poised to continue their upward trajectory. However, investors should exercise caution and wait for CMRE to release steam before committing new capital, as it trades in the overbought range on the weekly charts.

Furthermore, the BDI’s potential resurgence indicates that after a period of market consolidation, beaten-down sectors with strong long-term prospects, such as fertilizers and food stocks, are likely to soar. This presents an opportunity for astute investors to capitalize on the market’s cyclical nature and position themselves for substantial gains.

Incorporating the wisdom of renowned investors and philosophers can provide valuable insights into navigating the complexities of the BDI and market dynamics. Warren Buffett, the legendary investor, emphasizes the importance of being greedy when others are fearful. In the context of the BDI, this suggests that contrarian thinking and a long-term perspective can uncover hidden opportunities amidst market pessimism.

Benjamin Graham, the father of value investing, stresses the significance of thorough analysis and a margin of safety. By conducting rigorous research and identifying undervalued stocks in sectors poised for growth, investors can mitigate risk and position themselves for potential upside.

Moreover, the ancient Stoic philosopher Seneca reminds us to maintain a calm and rational mindset amidst market turbulence. By avoiding the pitfalls of emotional decision-making and focusing on long-term objectives, investors can navigate the challenges presented by the BDI and capitalize on emerging opportunities.

Critical Crossroads for the Baltic Index: A Defining Moment

One cannot fret over this; one has to adapt, bringing one of the essential sayings of the Tactical Investor to mind ” adapt or die”.

The Baltic Dry Index (BDI) was a reliable indicator of market direction. It would often top out or bottom out before the markets did, making it one of the select few technical analysis indicators consistently producing results.

However, this is no longer the case. The BDI, which worked well over the decades, is now useless and probably not good enough to use as toilet paper. It continues to trade at new lows, and the market continues to soar to new highs, proving market manipulation. Rather than fretting over this, it is crucial to adapt. At Tactical Investor, the saying “adapt or die” is essential.

Two Economic Indicators: Comeback Or Burial Time?

Copper has historically been a reliable indicator of the economy’s direction, but it is no longer as valuable due to the changing global economic landscape. The old rules and laws no longer apply as we enter a new phase of the worldwide currency wars. The market is in a state of maximum overdrive, and traders must adapt or die. The markets and copper prices no longer move in lockstep, and traders must be careful not to be misled by traditional indicators.

The current situation requires traders to be open-minded and embrace the new paradigm, even if it is difficult to understand. Market movements are not random but the result of calculated planning by those in power. Paying attention to others’ perceptions and planning accordingly to come out on top in any given situation is essential.

Technical Analysis Indicators: Is it Time for Copper to Make a Comeback?

In 2022, copper prices hit record highs, indicating that the global economy was not dire. Instead, it resulted from poor political decisions by world leaders, with the United States’ policies being a prime example. Despite a brief setback, copper remained steady and surged beyond the 4.50 mark, revealing that issues with inflation and supply were merely symptoms of bad policies.

As a result, copper is gaining momentum and is set to trade past 4.50; this also means that the market will be range-bound for years, posing a challenge for long-term investors who focus on indices. However, this presents an excellent opportunity for traders who can use market psychology and technical analysis to their advantage. Tactical Investor May 2023

It traded up to and beyond $4.50, but it couldn’t maintain the gains. The next challenge is to achieve a monthly closing price at or above $4.60, which would set the stage for testing the $5.60 to $6.90 range.

Navigating Market Complexity: A New Framework for Understanding

The journey through the Baltic Dry Index’s evolution from a reliable indicator to apparent irrelevance reveals a deeper truth about modern markets. While the BDI now trades 90% below its 2008 peak, this dramatic decline isn’t just a story of an indicator’s failure – it’s a testament to the fundamental transformation of global financial markets through unprecedented monetary intervention.

The Federal Reserve’s ability to flood markets with liquidity has not just challenged traditional indicators; it has rewritten the rules of market analysis. Yet within this apparent chaos lies opportunity. The very forces that rendered the BDI seemingly obsolete – massive liquidity injection, market manipulation, and the decoupling of traditional correlations – have created new patterns for astute investors to exploit.

The copper market’s journey provides a parallel narrative, demonstrating how traditional economic indicators must be reinterpreted in modern market dynamics. When copper surged beyond $4.50, it wasn’t just signalling economic strength; it was revealing the complex interplay between policy decisions, market psychology, and global supply chains.

For forward-thinking investors, this evolution demands a three-pronged approach:

First, contrarian thinking should be embraced as a strategy and a fundamental mindset. When the BDI signals distress, it may highlight opportunities in sectors like dry bulk shipping and fertilizers. Second, recognize that market manipulation has become a crucial variable in the equation rather than being a barrier to analysis. Finally, understand that successful investing now requires combining technical analysis, mass psychology, and adaptive strategy.

As we navigate this new paradigm, the wisdom of combining Warren Buffett’s contrarian courage with Benjamin Graham’s analytical rigour becomes more relevant than ever. The market’s complexity demands not just adaptation but evolution in our thinking. The old indicators aren’t dead – they’re speaking a new language that requires us to be translators and interpreters.

In this brave new world of market analysis, success belongs not to those who cling to outdated frameworks but to those who can synthesize multiple perspectives, embrace uncertainty, and recognize that in apparent market chaos lies the seeds of opportunity. The future belongs to the adaptive, the contrarian, and those who understand that sometimes the most valuable signals come from knowing when traditional indicators have lost their voice.