As a technician, I scour all the indicators out there to find clues for the next move. My best chance is to find patterns and trends that call out the direction with great accuracy, though nothing is perfect. The best setups offer the highest probabilities of following through on patterns. I will use momentum indicators, volatility bands, oscillators and stochastic-related tools to gain the edge I need for success. But these tools are all secondary indicators to the price action.
Price is where the truth lies. There is no disputing the final price. We can line up all the indicators we wish that may show future direction, but if the price is not cooperating (or supporting) then we have divergences. I will always defer to the price (and volume) when it comes to technical analysis. Recently, markets have been showing some signs it looks ready to crack. Oscillators have broken to the downside, volatility picked up, protection has been bought (put/calls lifting), insider selling has started to rise and big funds are showing less cash on the books (off the sidelines).
Yet, price has not broken down. In fact, the SPX 500 is simply range bound, bouncing between the recent low of 2233 and the all time high of 2282. That 50 point range has contained the index for nearly seven weeks when a powerful up day hit in early December (see chart). The main reason I will look to price action as the main tool is the secondary indicators often flash premature buy/sell signals. The oscillator moving from overbought to oversold may just be corrective action, so trying to follow on with a momentum (followthrough) trade we might get caught in a reversal.
The bottom pane (arrows) show this happened recently (these were dip buying opportunities).
Currently, price action is NOT confirming any of the bearish indicators. Hence, we interpret this as a market pause or rest before the next move. Is it up or down? Consolidating at a high level or base tends to resolve in the direction of the trend – so that direction is UP. The current pennant formation is bullish, the recent pullback in the momentum indicator (bottom pane) was a bull retest – which is a low risk entry point.
We are always looking for the clues that will get us completely out of the market before a major collapse ensues. Nobody wants to be left holding the bag, and for those who lost in the financial crisis 2008/09 is still fresh in our memory. We are conditioned to avoid the pain, but it is sometimes inevitable. Throughout history we have heard story after story of those wiped out or hammered mercilessly when markets took a nosedive. The crazy stories are endless. Yet, if we focus on the price action, interpret the best we can then get a read on where markets may head down the road and act based on the facts of price action. Price will never lie and will be the BEST guide for your analysis.