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April 19, 2017 - Markets of Uncertainty
Back “In a Box” — Where Will The Market Bounce? By Dr. Van Tharp Trading Education Institute
Lately, new warning signs have been showing up that market participants seem to be getting more and more cautious. When you look at the S&P 500 chart however, the sideways market direction that began in February clearly continues today. How should traders view these two mismatched factors?
One of the market truths I’ve found is that I can trust prices much more than I can trust pundits or public opinion. Loud voices are starting to herald changes in the market. When there’s a shift like this, a German word often pops up — “zeitgeist.” Literally, zeitgeist means “the spirt of the time” and people use it generally to mean the mood of a group or of society.
If you listen carefully now, the market narrative is very different than the mood of market voices. The narrative is the major driving force in the market. The mood or zeitgeist is the prevailing sentiment of the voices in the media. I would describe today’s market zeitgeist as uncertainty bordering on negativity.
Charts of Uncertainty
Two charts show us signs of the current zeitgeist. First, let’s look at the price chart for gold:
In a macro sense, gold has traditionally been considered an inflation hedge — which in much longer timeframes, is probably so. But from a trader’s perspective, I view short-term moves in gold as a very good uncertainty meter. In this chart, we see gold prices at the highest level since the election last November, indicating a growing sense of uncertainty among market participants.
In a similar way VIX, or the Volatility Index, is often called a “fear gauge” for the markets. Here’s the current VIX chart:
In the face of geopolitical unrest over the last two weeks, the VIX jumped — but never really pushed very high at all. Its highest price last week fell far short of the fear levels running up to the November election. The mild rise informs us that even with bombs flying in the Middle East and missile tests in North Korea, options traders never really added a significant risk premium to the circumstances.
These two indicators of uncertainty and fear are typically quite useful at market juncture points. At the moment, however, I believe they do not signal any market turn — just yet. In fact, the muted VIX run-up leads me to believe that we have a good chance for U.S. indexes to once again, bounce off the bottom of our sideways box.
Despite significant geopolitical unrest, I believe the minor response of the VIX and the unbroken support at the bottom of the box indicate this stair-step market has a higher probability of stepping up rather than stepping down when we exit the current box.
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