Is it safe to start grabbing cheap stocks on the hope we are seeing a bottom? Let’s take a look.
Markets look to extend Friday’s rally at the open and while this might whiff of a reversal, we want to dive in and confirm first and then look at ways to trade this info.
When we look at the chart we can see we are still in a downtrend. There are many ways create a trendline on a chart but I tend to rely on the simplest way. Take the high or low from when the trend started an draw the line to where we are now. When we do this on the S&P we can see what have broken above the trend line a couple times but have been pushed back down further. This typically indicates there is a lot of force behind that trend.
But we do see something pretty interesting here. Take a look:
In the last month or so we see the market moving sideways in a pennant pattern. This is pretty important as these patterns are a sign of a potential big move on the horizon. The big question is when to expect it.
With all of the current news leaning toward the bear side (rising inflation, cooling jobs market, global tension) the likely scenario is that we will break to the down side again. This could happen in a couple ways. We could see a major event that rattles a fragile market and starts a selling frenzy or it could just be a continued bounce downward as we have see so far this year.
There is a possibility that declining gas prices and positive earnings reports could start to turn things around. The key is to watch for that confirmation. It could be argued that the pennant is actually a bottom forming. Seeing a break above the broader trendline will be the signal that we have a good chance at things shifting.
Joe Duffy’s Little Black Book of Momentum Setups has some great pennant patterns that have proven very effective. If you haven’t seen it, check it out here for free.
Keep learning and trade wisely,
Market Wealth Daily