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?
This week, we’re looking at a long-term topping pattern but we also have a zoomed-in chart insert showing more recent price action. Viewing the same chart through different lenses allows us to pick up on all the bullish and bearish characteristics that exist across various timeframes.
This is exactly why we like to zoom out at times and identify the underlying trend, as well as zoom in to analyze the price action over the the near-term for a more tactical outlook. We also look at charts across all timeframes, including monthly, weekly, and daily, for this same purpose.
Let’s take a look at the chart(s) now.
First, lets start with the longer-term outlook. This is an enormous rounded top, which is a bearish pattern. Remember, we like to buy smiley faces. As for this setup, it’s frowning right back at us.
Prices recently violated key prior lows, retested them from beneath but failed, and then proceeded to collapse lower at an aggressive rate.
How about the long-term/primary trend? I included the moving average to help illustrate this. It is sloped almost straight to the downside… this tells us the trend is unequivocally lower.
Now let’s take a look at the chart insert which shows only the action since prices recently tested and violated the support level drawn in gray.
As you can see, this is definitely a key level as price reacted to it a number of times from both above and below, before finally breaking down.
Although more recently, price has appeared to stabilize in a bearish continuation pattern (just because it’s “bearish” doesn’t mean it can’t resolve higher).
There is also a potential momentum divergence at work, which means sellers have become less aggressive as the trend has continued lower. Despite this, momentum still remains lackluster and in a bearish regime.
So, what do we do here?
Is price too extended from the moving average? Do we want to make the bet that some mean reversion is likely to be sparked by this bullish divergence?
Do we want to do nothing until we have more data? Maybe wait for a more formidable base to form and the moving average to flatten, providing a better foundation for prices to move higher from?
Do we want to wait for this continuation pattern to resolve and then bet on a move in the same direction?
Or, with prices already pressing on the lower bounds within the context of such a severe downtrend, do we just short this right here in anticipation of a downside resolution?
Tweet me your thoughts @Sstrazza or email me at firstname.lastname@example.org and check back on Friday to find out why this chart is relevant.If you enjoyed this post and want access to our premium research, start your 30-day risk-free trial or sign up for our “Free Chart of the Week” to receive more free research like this.