Stock Market Key Decision Point
March 22 2018 - Why the Market Is At A Key Decision Point In One Chart By Dr. Van Tharp Trading Education Institute
Long-time readers know that I love basketball — to the point of mixing it up still with the 20-somethings in local league play. We’ve just passed one of the best sports weekend of the year and yes, it revolved around my beloved sport. Beyond my personal level of excitement, the NCAA Men's Basketball tournament is one of the biggest events in sport by many metrics. How big? The tournament makes more ad revenue than the NFL playoffs (which includes the Super Bowl).
Once again, March Madness worked its magic with upsets and Cinderella stories capturing sports fans’ imaginations. This is bound to happen when underdog small programs play tough against and even regularly beat their better-known opponents. This year was no different. In the very first round of play, one of the great David vs. Goliath stories unfolded when the unknown University of Maryland Baltimore County Retrievers knocked off the overall #1 seed University of Virginia Cavaliers. The upset was not only the biggest in the NCAA basketball tournament history, it was truly one of the biggest upsets in all of sports. The Retrievers didn’t just hang tough during the game and sink a buzzer beater to win. They completely dismantled their opponent with a 20 point crushing of the Cavaliers, the team deemed to be the best in the land at the start of the tournament.
Besides the great triumph of human spirit exemplified by this tournament, why talk basketball in a trading and investing newsletter? Because this most improbable of victories happened when the “little guy” figured out the tendencies of the “big bad #1 seed” and leveraged that advantage — over and over again. That’s what individual traders and investors do — we identify price tendencies and use that edge to make profitable trades. Charts are my preferred tool to do that.
Charts help me understand what the market is doing and what it might do. They help dispense with all of the rhetoric surrounding the markets. It's so easy to get caught up in that and there has been a lot of rhetoric ever since early February. That's when the “inverse volatility” bubble burst which sent the U.S. market to its first correction in two years.
For so long, the dialog (and the trading action) had been a one way street — up. The “flash correction” last month — the fastest 10% pullback in 80 years — changed that. With a two-way market now, those used to the one-way game are looking for some answers in the up and down movement. The bears have found their voice — and people are willing to listen.
Whichever way the S&P moves, the formation of bars guides my current thought process about possible price movements. What do the charts say? We only need to look at one today. I find the above S&P chart very informative — it shows lots of factors converging as we head into the March 21 Fed rate announcement.
Price action has pushed right down against the top of the two-week sideways consolidation box of last December (the light blue box). Price has also come right down to the upward sloping trendline drawn from the lowest close of the correction.
There's also a trendline formed by the series of lower highs made since the end of January. With these two converging trendlines, you have a pretty nice triangle formation. As a pattern, symmetrical triangles are most commonly seen as continuation patterns. If that is the case for this triangle, then we would expect an upside breakout to challenge the January highs. I believe this is the highest probability outcome. Should this pattern resolve to the downside (the lower probability), then the intraday February 9th low comes into play (which is 7.6% below morning prices on March 21).
With the new Fed Chair Powell’s first rate announcement and press conference on the afternoon of March 21, any surprising new hawkish or dovish tendencies could drive the markets in the near term. I expect him, however, to take a fairly centrist path his first time out.
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