From the desk of Steve Strazza @Sstrazza
New Mystery Chart!
For those new to the exercise, we take a chart of interest and remove the x/y-axes and any other labels that would help identify it. The chart can be any security in any asset class on any timeframe on an absolute or relative basis. Maybe it’s a custom index or inverted, who knows!
We do all this to put aside the biases we have associated with this specific security/the market and come to a conclusion based solely on price.
You can guess what it is if you must, but the real value comes from sharing what you would do right now. Buy, Sell, or Do Nothing?
Here’s this week’s chart.
Click Chart to Enlarge Image.
I love to fish and I eat what I catch. As most people know, the worst eating fish are the ones we call “bottom feeders.”
Ever wonder why catfish is served with such a heavy fry that you can barely taste the fish . . . ?
In markets, we also have “bottom feeders.” These are investors who like to find opportunities in the weakest assets. In other words, they’re fishing in the wrong ponds, so the stuff they catch typically isn’t the best..
This is comparable to markets. If you aren’t fishing for the good stuff, the outcome is less likely to be a good one. The chart above is exactly the kind these investors look for.
It’s a risky game but one that can be playedin a responsible way. Bottoming is a process and some bottom feeders can be delicious. How many of you love shrimp?
Just like fishing, bearish-to-bullish trend reversals require patience. But if you wait for a nice base and strike at the right time, you can catch some real big winners.
We can easily tie this analogy back to the Mystery Chart.
The question to ask is whether you think the bottoming process has already played out, in which case you’d probably be buying this chart against its former lows.
With a positive momentum divergence confirming following a failed breakdown and fast move higher, this one definitely has some bullish characteristics we look for in these situations.
At the same time, this is still a consolidation within a primary downtrend, and as many of you know, patterns tend to resolve in the direction of the underlying trend.
Another thing to note is that the more times a level is tested – as well as the more frequently these tests occur – the more likely that level is to break. You can already see that sellers are becoming more aggressive: support at the prior lows has been tested several times recently.
This doesn’t have to be a failed breakdown . . . it could just be a false start. In that case, support would eventually be violated and followed by further downside.
But for now, we simply don’t know which it is – we need to see more data before we can make that distinction.
So let’s put the question to you: Is this chart ready to reverse and head higher? Or does the trend persist, in which case it resolves lower?
One of the things we like about this chart is that regardless of how it plays out, our risk is very well-defined to make a bet in either direction.
So, are we buying, selling, or sitting on our hands for now?
Is this a muddy catfish or some juicy shrimp? Let us know what you think.
And let me know if I’m wrong about catfish… I’m always open to trying new things.
Tweet me your thoughts @Sstrazza or email firstname.lastname@example.org and check back at the end of the week to find out why this chart is relevant.