Everyone has different biases. As we try to improve as traders we can try to minimize the impacts of these biases, but those biases can still manage to creep up in our blind spots. As such, it is always worth reviewing different perspectives than your own. What I find interesting is how close those perspectives may be off by only a couple of degrees.
This is the current daily chart of SPX on which I have my technical indicators drawn. The key trendline that everyone is watching is drawn from the peak of the market at 4818 down along the various peaks and lower highs of the market since then. I marked the specific peaks which touch this trendline. I also made sure to circle the most recent action in which, after breaking out above this trendline, we have fallen back beneath it, leading me to believe we are in a failed breakout, which is quite the bearish action.
This is the same chart with the same trendlines. The key trendline everyone is watching is still drawn from the peak along various peaks and lower highs of the market since then. There is only a very slight difference in the selected peaks for this trendline. And the very slight distinction of this trendline can make technical analysts come to very different conclusions. Using this very similar trendline, the argument could be made that the breakout above this trendline is still intact and that recent weakness is simply a retest of the descending trendline and we are ready to break higher.
The first trendline (which I am following), is drawn from the market peak through the highest various peaks of this descent, touching the March 29, 2022 highs and December 13, 2022 highs. The second trendline is drawn along the peaks, but “adjusted” after the August 16, 2022 peak didn’t quite reach it and it seems to have worked as well for the December 1, 2022 peak. The wick above this line on December 16 is essentially ignored as a “fluke”. What is really interesting is that both of these arguments are valid in their own way. Sometimes some price action really doesn’t mean much and should be ignored. Other times, we find that including that same price action is important to the prospective analysis. It really is subjective and we won’t really know for sure what would work better until it already happens.
In these cases, I look for other technical indicators which may support each argument. For the bearish case, I made a post earlier this week about the longer term Monthly chart and the fact that we are in the midst of rejecting the 20 Month MA. On the shorter term charts, regardless of where the descending trendline was drawn, the breakdown beneath the ascending trendline (drawn from the October lows through the December lows) is a much cleaner break and more definitively reflects the break in the rate of buying supporting this market.
For the bull case there is the 200 Day Moving Average at 3940. However, since November 2022 we can see that we have danced around this average, crossing over several times. As such, I don’t think it actually has much sway right now. I think this could actually lead to a small initial drop (short term bulls throwing in the towel) and pop back up for a bit (kills new shorts, bulls again cheer “Bull market back on”) before really beginning the next big leg down.
As for specific stocks I am watching to take advantage of in this expected drop, I have posted several times about these and I think they have great potential. As always, do your own due diligence, size your trade in a way that makes sense for your account and risk tolerance.
MOH. This already began its descent since I mentioned this in the comments. It looks like a lightly traded stock so the moves could be volatile in both directions. I think this has a chance of at least testing the 50 Month MA at 225 as this has had a tendency to do in the past.
GME. On a monthly, this is primed and ready for a big spill to get cut in half. First target is at least $10. Next target is $5.
ILMN. This is another light volume stock. The weakness is persistent. The monthly chart had a nice bearish close for February. My initial target on this is about $120, next target is $80 if it can break down through there.
IBM. This one is interesting as it looks extremely choppy on monthly chart. But on Daily (you can search yourself). This has been exceptionally weak since the December swoon in the markets. I think this has a chance to continue downward towards long term support on the monthly chart between $115-$120. Beyond that (a break beneath $115), who knows how far it could fall. Given the consistent support, I’d rather cover my trade at that level and wait to see if the weakness continues and wait for a better set up (i.e., set up completely new trade parameters) to make that bet.