Wednesday, September 9, 2015

Analysis of U.S. stock indexes

Last month, we discussed possible topping patterns in U.S. stock indexes and individual stocks. Let's see what the charts have done in the two weeks since the start of heightened volatility.

Let's look at the SPY (S&P 500) chart:

We see a dramatic breakdown from a 6-month H&S top. Prices rebounded from the October 2014 low and have been coiling in a pennant pattern for 2 weeks.

Today SPY was decisively turned back at the 198-199 resistance (formerly support) level. This rejection does not mean that the current 2-week coiling pattern will become a bear pennant that continues the decline. There are no "musts" and "shoulds" in trading other than the utmost importance of limiting our risk on every trade. The current coiling pattern can launch a move up and retest the 204 level and even beyond. Again, there are no guarantees in the market. Especially this market, which has been an epic bull run since the March 2009 low. We must be open to all possibilities. And it is possible that the market will break down and ultimately become a harsh bear market but only after SPY races back up to 204 or even a new all-time high.

So we must keep our eyes open and accept the price action as it is. If we are short, then we must have a strict stop level at which we cover our shares - no ifs or buts. The same for longs: we must stick to our stop level where we will sell and cut our losses.

Please remember that there will always be more set-ups to trade. Let the price action tell you the market's intention. Prices are coiling now. That means the market can go up or down. If it breaks down, then we might look for an advantageous entry spot for shorting. If it breaks up, then look for a good spot to go long . Or, don't trade. We are not required to trade. Doing nothing is often the most profitable move.

Stay patient. We need psychological experience in the market, and that comes through living through a complete market cycle. Then we have a chance of accepting what we see rather than what we want to see.

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