From the desk of Steven Strazza @Sstrazza and Ian Culley @Ianculley
Check out our latest Mystery Chart!
What we do here is take a chart that’s captured our attention, and remove the x and y-axes as well as any other labels that could help identify it.
This chart can be of any security, in any asset class, on any timeframe. Sometimes it’s an absolute price chart, other times it’s on a relative basis.
It might be a ratio, a custom index, or maybe the price is inverted. It could be all three!
The point is, when we aren’t able to recognize what’s in front of us, we put aside any biases we may have and scrutinize it objectively.
While you can try to guess the chart, the point is to make a decision…
So let us know what it is… Buy, Sell, or Do Nothing?
Here’s this week’s chart!
It’s hard to ignore the massive rounding top formation as this chart is really frowning at Technicians by means of its gigantic bearish base. Making matters worse sellers recently took control as they not only violated a vital support zone at key prior highs but have also been defending it successfully in the time since.
As is well-known by now, we like to buy charts that look like ‘smiley’ faces, not sad ones… and this week’s Mystery Chart looks downright depressed.
An easy way to remember this is to think of it as your portfolio’s “Equity Curve.” While of course, we’d all prefer a straight line up and to the right… few can achieve that. Sometimes, a short-term trend that is higher and to the right is good enough to satisfy an investor. Do that long enough, and eventually, you’ll have an orderly uptrend, meaning you’ve achieved a consistently profitable strategy!
Long story short: Almost every uptrend starts as some form of a BASE!
We like to catch most trends in the early innings, and one way we do that is by betting on the continuation of base breakouts or rounding patterns. This simply means taking a position in the same direction that these patterns resolve.
However, there are some things taking place on this chart – particularly, in the near-term, that while might not be significant enough to warrant a bullish outlook on their own, are quite powerful when considered in the context that they are all occurring in and at the same logical place and time.
Let’s talk about some quick:
- Price has already retested the breakout level twice as it continues to show resilience and chop around this key area – posing the following question:
- Is this an ordinary consolidation at the former lows, after which prices make a decisive move lower?
- OR, is this actually a failed breakdown, in which case the recent action is simply a shakeout, and prices soon rip higher?
- There is a bullish momentum divergence in place as momentum continues to make higher lows despite the lower lows in price.
- Additionally, momentum could not even achieve “oversold” which is something we look for as confirmation of new lows.
And most importantly, price is currently consolidating at a critical level of interest. There isn’t a more logical area to see this chart carve out a bottom and reverse higher. Whether or not that will be the case – only time will tell.
So, we’re left with the following…
Will price soon confirm the potential failed breakdown and momentum divergence, and spark a move higher?
Or did price just complete a successful retest and is now headed further south?
The point of this exercise is to see what you’re doing. So what’s it going to be?
Are you Buying, selling, or waiting for more information?
And as always, be sure to check back later in the week to find out why this chart is relevant.