I thought in-light of the last few days “market” reaction to what’s playing out globally, as far as trade and more, that I would revisit a prior example and show the whats-and-hows it may be signaling, both for some pragmatic insight, as well as what it may be signaling in a broader context. So, here we go…
As you remember I began annotating a chart a few weeks back of the Russell 2000™. The reason for this was that, I believed, I saw something intrinsic within the developing formation that could be signaling possible issues ahead. Then, as time rolled on, the pattern seemed to negate (i.e., signaling cause for worry was possibly unfounded) what it seemed to signal prior. But as time rolled on I continued to follow it, and again viewed what I believed were the same initial signals, only now, transforming into an even larger pattern.
Then, and once again, this followed the same course as above but, just like the prior, it seemed to have morphed into another. The difference this time was all the “markers” if you will, seemed to be all in the same places causing me to infer that odds of the original signaling may still be intact, just the time or “worry point” for caution had moved.
It would appear it is doing just that, and below I’ll illustrate. Here was the prior observance. To wit:
Here’s what is transpiring as of this writing, before the “markets” open here in the U.S. today, again, to wit:
As you can plainly see with the “markets” most recent downdraft, as far as any “signaling” may be concerned, there is none. At least via a technical view in a larger time frame.
The reason this is important to understand for those who don’t fully grasp the whole “technical thing” is this, as I said prior: Until there is a clear break either up and out – or down and out, of the top or bottom of that channel – the chances of the market ping-ponging in-between, while still rising, has the most favored odds.
But (and it’s a very big but) the reason why the above (e.g., Mean Reversion Channel) is so important to watch is, because it is this type of pattern progression that many, if not most on Wall Street, and yes, even the HFT algos themselves, actually, especially the algos pay attention to for valid signaling processes. (Think: “Moving average crossovers” to be in this same camp)
So, until that time, as I noted on the above – You’re in “no man’s land.” We all just have to wait and see what happens next.
Now, with that said, for those that remember (and if not here’s the link) when I was making my case I used another example to demonstrate my argument for a colleague who was asking for more in-depth explanation. The example I used was Tesla™. Here’s how that is currently playing out. First, here’s the original take. To wit:
Again. just to reiterate, the reason for the above was to show why “mean reversion channels” are so telling. Because as I pointed out, just like my prior examples of the Russell, Tesla was exuding the same characteristics. i.e., At one point it looked like one pattern developed, then negated it, and so-on-and-so-forth, till it seemed to morph into the above. And as I stated in the Russell example: “Until it breaks either way, you’re in no man’s land.” So what happened next? Good question, let’s see. Again, to wit:
As you can see, precicely from that initial “won’t get fooled again” moment, Tesla remained within its confines and preceded to bounce along, ever so slightly, along the bottom of that pre-drawn channel. i.e., The initial “Oh crap!” moment began to ever-so-slowly morph into a “phew!” But is that it? Let’s see shall we?
The above depicts Tesla as of the close on Monday. In the bigger picture the latest is what many “BTFD” (Buy The F’n Dip) enthusiasts would consider an “opportunity.” Maybe it is, maybe it isn’t. But what the above does show is when very clear patterns begin to emerge within the very few patterns Wall Street considers valid, and maybe more importantly, the algos, it’s probably a very solid and pragmatic signal for others looking for clues to pay attention too, also.
What happens next? As always…
We shall see.
© 2018 Mark St.Cyr