Some of the smartest market experts were calling for a crash over a year and half ago. In the period right after the COVID crash in March of 2020, analysts drew insight from previous crashes and strongly predicted a follow up drop that could plummet significantly. Good thing they were wrong. Or were they????
Market analysis be it fundamental or technical is based on historical patterns and evidence. When a pattern that starts to form that has occurred repeatedly in the past, the assumption is we will see a similar outcome. And in defense of that approach it is accurate most of the time. In fact, some patterns have an extremely high rate of repetition. That is the beauty of that analysis and it is what allows many traders to carve a very comfortable income out of the markets.
But what happens in those instances where the pattern, the exact price movement that has happened over and over again, doesn’t repeat?
Take a look at two charts of the S&P:
Big crash followed by a seemingly endless climb to significantly higher highs. Now look at this chart of the S&P:
The first chart is of 2018-19 with a crash in Dec followed by a strong rally. The second chart is from 2020-21. Hmmm.
So what do we do about it?
The big factor in these patterns is time. If you take the time element out of the equation, you can match patterns to other movements in history all day long. Simply make the current timeframe you are charting longer or shorter until you see what you are looking for. Markets go up and down. Widen the screen, shrink the screen and you can find a match.
The useful piece of information is that the shape of the pattern is consistent. This current market will go down. If history does provide any guidance, it will drop quickly when it does. We have seen a long list of factors that should have change the direction of the market but didn’t. And, we are very extended in this rally. This all lines up to a powerful shift when it decides to happen.
Don’t think this is all gloom and doom. These drops don’t just happen in a day. When they happen, they happen rapidly over a period of weeks and months. The good news is that is strong momentum and it can be traded in either direction, up or down. When the shift starts, we just have to recognize it has finally shifted. It will most likely be triggered by a big news event like failing banks or COVID and it will have wide reaching ramifications.
If you want to brush up on how to recognize when momentum has truly shifted, read Joe Duffy’s Little Black Book of Momentum Setups. It will help you stay in for the climb up and spot that shift early and be able to take advantage of the drop.
Keep learning and trade wisely,
Market Wealth Daily