When Confused About the Markets, Go to the Charts

The charts will always give you factual information, past data that show patterns that will help to determine future price and direction.  There is no subjective reading in the charts, though we can certainly interpret trading behavior and make assumptions based on prior patterns.  The benefits of technical analysis is to allow us to objectively make an assessment of the landscape, to determine a probable outcome.  It's not perfect or guaranteed to be right, but we put the odds in our favor.

There is no better time than now to look at the charts to get an idea where the trend lies.  Without much difficulty we can see the trend is down, a deep drop since late October indicative of a bear market.  Within the scope of this bear we have some powerful moves up.  Within bear markets have come some of the most spectacular rallies.  But they tend to change psychology quickly, many lose sight of the bigger picture (which is down) in the hope they can pick the bottom.

There is nothing wrong playing the bull side in a bear market.  Prices do not move in a straight line, and down moves tend to be sharp and swift. 

Once the SPX 500 broke the 200 moving average and confirmed in late December the trend was in place.  Now, not every stock has been punished, but the great majority have been damaged.  The bullish percent index (number of stocks on a point/figure bull signal) hovers around 30%, which says 70% of stocks using this methodology are not bullish.  The indicators as shown on the chart are steep in bearish territory. 

Gaps up and down are wearing everyone out, bull and bear alike.  As 'RevShark' Jim DePorre likes to say, 'bear markets will not scare you out, but will wear you out'. With price underneath the moving averages (as of last week) the bulls have some work to do.  Meanwhile, there is action on both sides of the market.  If the volatility is just too much, then put on some protection (via index puts) or just sit it out for a bit.  Return of capital is sometimes more important than return on capital.


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