By: Dr. Mike Campbell

The golden rule of stock markets is buy cheap sell dear. In practice, what this means is that when markets are rising, investors seek to buy stocks on the belief that they will be going higher. In a falling market, they seek to unload positions before the value of the investments that they hold fall back into losses. The process is not an absolute one, so traders will come back to the market and buy stocks which they think have been oversold. These stocks will rise and then may be sold off to take a profit. In this way, stock markets act just like forex markets since these waves represent support and resistance levels for these stocks. However, as forex investors know, support and resistances levels are not set in stone.

Markets around the world are being driven lower by doubts over the debt crisis afflicting the USA and Europe – although Japan has debts which are more significant – and concerns that the anaemic global recovery is petering out. If the recovery ends, then another recession will ensue and with it demand will fall. From this perspective, global markets seem expensive, hence the current downward trend. Some analysts believe that this is the start of a bear run in which market sentiment will remain weak and markets will trend lower.

Asian markets fell between 2.5 (Nikkei 225 and Australia’s ASX) and 6.2% (South Korea’s Kospi) in yesterday’s trading. The Nikkei stands marginally higher now than in the immediate aftermath of the earthquake and tsunami in March. US and European markets have also experienced strong falls between 4 and 6% in Europe whereas the Dow Jones ended down by 3.7%.