Economic trends
Within this page, we will look at patterns such as the Head and Shoulders model, rising wedges, and the relationships between certain financial factors.
1. Rising and falling wedges
The rising/falling wedge is amongst the simplest of patterns that one can identify in a graph.
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A rising wedge is a pattern of rising maximums and minimums (and the opposite for a falling wedge) that continues on towards a smaller point. It can be illustrated thus:
2. The head and shoulders model
The head and shoulders model is characterized by one peak surrounded by two smaller peaks. Normally, the head and shoulders pattern is a result of a combination of rising and falling wedges.
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It consists of the main peak and the Left and right shoulder. There are two troughs between the shoulders and the main peak. The bottom of the troughs is called the neckline. It can be represented as:
Please note that the head and shoulders model can be reversed as such:
3. The gold relationship.
One important economic indicator and relationship is the price of Gold.
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This is because gold is seen as a "Safe haven" asset that has the ability to keep it's worth. Investors treat gold as "Safe" because it has intrinsic value, unlike almost all financial instruments. The value of gold is seen a valuable because unlike other assets, it has actual material worth from the gold atoms in it.
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Thus, gold is an important indicator of fear. The more fear investors have about their portfolios, the more they will buy gold. This is helpful when predicting panic selling, where investors dump their stocks in favor of gold.
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Thus, this leads us to the second relationship between gold and other financial assets. Gold increases in price when the market is bearish, or when there is high volatility. In times of good returns and bull markets, the price of gold will fall. Hence, we say there is a negative correlation between gold and other assets.
3. Interest rates
Interest rates are the defining factor in most financial products today. In the modern world, interests rates are set by the American Federal Reserve and it's monetary policy can make or break markets.
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In short, interest rates control people's savings, loans, and most importantly, money supply. When interests rates are high, people tend to save more, and when interest rates are low, people tend to spend more. This controls the amount of money in circulation and affects the profits of companies.
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For example, when interest rates are decreased, the share prices of companies tend to rise as consumers spend more. Conversely, when interest rates are increased, the share prices of companies are decreased.