JOHN MAYNARD KEYNES expressed it best when he wrote: 'Nothing is more suicidal than a rational investment policy in an irrational world.' With the Hang Seng Index around 12,000, the charts seem to imply that we are heading into a major bull market and many (undecided) investors will now re-consider buying equities.
However, before you plunge back in it might be worthwhile to pause and consider this: One of the problems of making money in the financial markets is that you have to be willing to lose it first in order to (hopefully) make some.
It is important to understand that in the Alice in Wonderland world of global financial markets, bad news can be good news and good news can be bad news and 'sometimes' fundamentals do not really matter. With interest rates at 45 year lows, liquidity is exerting its influence on the real economy and company profits seem likely to be the catalyst for the next leg up in global equity markets.
Success in making money in the stock market depends on handling prices - and you had better know what they mean. 'Price is what the greater fool is willing to pay.' Price is a momentary consensus of value of ALL market participants, expressed in action.
Price is a psychological event - a momentary balance of opinion between bulls and bears. Prices are created by masses of traders and investors - buyers, sellers and undecided people.
Prices reflect the actions of all traders and investors. Fundamentalists and technicians, insiders and hunch players, smart money and dumb money, everybody. Price and volume reflect every trade that you and millions of other people make. Market prices are a reflection of human emotion, not company value or earnings potential or anything even related to true value. The value is fear and greed and hope and despair. If enough people believe and act on that belief then you will see those magic numbers appear in every time frame and every market. 'Self-fulfilling' prophecies that make money are better than fundaments that do not.
In other words, some people are undoubtedly basing trades on these support and resistance levels, so even if you think doing so is unwise, it is even less wise to pretend it is not happening. Perhaps history does not repeat itself exactly but sometimes ignorance thereof does.