Instructor | Wealth Management
This is a touchy subject, market reversals and really determining what is bullish and what is considered bearish. To most novice traders this is a large area of confusion. So how do we determine whether an asset class is ready to reverse? There are a few different ways we use in conjunction to give us 'proof of concept' to make a trading decisions.
The first way, and main ingredient, is the price chart. Where most novice traders fail is looking at small time frames. While a 15-minute time frame may seem bullish it's really the macro (weekly/monthly) time frame that controls the players sitting at the table. So let's take a look and breakdown the S&P 500 futures as an example for this mini-lesson.
(Click on the charts to expand them)
What doesn't matter is what happened ten years ago or even two years ago on this chart, and this is where many novice investors get it wrong. What does it matter if you think price of the S&P500 can trade to $2300 if we cannot breach $2600 first? And this is where many of us deploy the wrong strategy for the current market situation at hand. For me, I am an active trader so a pullback (not a large market correction here) is good for my strategies. So taking this chart above let's see how each investor from the 4 various programs at Landshark would deploy their strategy:
Wealth Management: S&P 500 is bearish, but does not mean a correction. What it means is trimming part of the long holdings and placing hedge trades.
Futures: Large macro set up means that you're not looking for 2-3 point E-Mini futures trades, no, you're riding the wave and looking for 20-30 point trades.
Advanced Options: Swing trade, pre-earnings and directional strategies apply here. A great opportunity to potentially have large outsized gains on large stock reversals.
Core Foundations: Ability to recognize that this current time is great for swing-trade short ideas and the use of certain ETF's in the watchlist.
So this one chart gives us a lot of edge as investors and it's the reason we rely on it so much as an overall market indicator no matter what strategy you want to apply.
What we're looking at here is a daily chart and a potential scenario. If we were to sell off the natural reaction, as of the past few years, is to buy the dip. But what if that dip does not make a new high? Then that's a reversal. This is the same concept for any price-chart and any asset class. Buyers and sellers are on the chart in front of you. Not on CNBC based on someones 'gut-feel' or in some Yahoo Finance article written by a journalist who has no skin in the game. The data you need has and always has been staring at you, you just have to learn to read it correctly and that's where we come in.
You can learn more about market timing and price chart analysis in our Core Foundations of Trading program.
I hope this article shined some light on some key concepts.