The ‘dog’ days of summer…

August is always a tricky time in the markets. Normally in August volumes drop right off as traders and investors are busy enjoying more exciting things than staring at computers.

However, the last few years have been anything but normal. The quixotic state of the world economy and very shaky base of the Eurozone has meant that the summer has become a more interesting time for trading.

Last year for example there was a major crash during the summer. Any kind of volume can make a huge impact on the markets – too many sellers with no buyers and prices soon plummet  somewhat more than usual due to a lack of liquidity. Generally, this has to be bad news for long-term holders, but, represents an opportunity for the more nimble traders – particularly those of a volition towards so called ‘swing’ trading – a style I know is advocated by this magazine.

The hard call is deciding what positions to take and how to manage it (if your off on holiday yourself then leaving open a bunch of positions is not perhaps the most sensible strategy).

So will this year mirror last year in terms of trouble? It’s quite possible, with Spanish bonds reaching new highs and only soothing ‘words’ as opposed to actual from ECB president Mario Draghi to try and turn things around. With the Eurozone leaders on holiday too, any small event could set off a significant market dislocation.

If it does, the obvious choice is to take small day-long short positions on the major index’s my choice would be the FTSE100 and AIM50. The key marker for me is the volume – if volumes build and the market is headed down,  then I am going to stay open until right before the close. If volume wanes intraday then I know the market is ripe for a potential corrective spike as sellers abate.

The graph below shows August 2011 – the correlation between volume and down days in the FTSE looks bears this out. You should however be careful jumping on the short side at the tail end of a climatic volume blow off – get this wrong and you’ll get your hands blown off!

Of course the triggers are not the volume itself, but the market and political events shaping traders thoughts – the key is to watch these events and how they match volume in order to make a profit and/or avoid losses on your portfolio.

A great place to go for looking for economic data is economy.com. Here there are the key dates  for future data releases by Country – perhaps start with looking at key date for Spain and Greece in August…

Profitable trading to you all as we enter the ‘dog’ days of summer – let’s hope some of my ‘dogs’ have their day!

City Unslicker