The stock market is complex. The number of inputs is staggering.
Setting aside the complexity, the simplest thing investors can do to gain valuable insight is to look at patterns. To explore what might be next for stocks, let’s look at a chart.
Chart
Please click here to see an annotated chart of S&P 500 futures ESH8. Similar conclusions can be drawn from popular ETFs such as S&P 500 ETF SPY, Nasdaq 100 ETF QQQ, and small-cap ETF IWM. It is more instructive to use a futures chart because futures trade overnight and there is a very important point on the chart that is visible only on the futures chart.
Please note the following from the chart:
• In recent history, most of the very shallow dips formed a V pattern. In a V pattern, the dip is bought and the market recovers.
When the market dipped this time, many were expecting a V bottom. The chart shows that a V bottom did not occur. This was addressed in the early stages of the stock market dip, when many gurus were predicting a V bottom. From the Morning Capsule made available to subscribers of The Arora Report: “If the stock market continues to go up from here, it would have formed a V bottom yesterday. Historically, V bottoms are less common than the retest. If a retest were to occur, the market would fall back to yesterday’s lows. The momo [momentum] crowd likely has stops under yesterday’s lows. A typical scenario would be hunt-and-destroy algorithms to become active, take out stops of the momo crowd and then for the market to rebound. If a retest occurs and it fails, then the probability of something more than a garden-variety correction will rise.”
This observation has now proven spot on. A V bottom did not occur this time.
• The chart shows that a retest of the prior low marked with a horizontal white line is in progress….Read more at MarketWatch.
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