Given the recent market volatility, many traders may not be feeling much Valentine’s Day love, but MoneyShow’s Tom Aspray takes a technical look at some familiar patterns that might lead to promising opportunities.
It is a common view that traders, generally, like volatile price action, because they are able to take advantage of the sharp price moves that often take place in a brief time span. Some do not realize that traders look for familiar patterns during the volatile periods that can provide the best opportunities.
After the past two weeks, I doubt many are feeling much Valentine’s Day love for the market and are glad they have a three day weekend. The plunge on February 3 supported the view of many market bears, while those who were not short expected a day or two of consolidation, or a weak rebound, before the market decline resumed. Ideally, they would get a sharp two-day rally that would stall on the third day below the 20-day EMAs and this would give them an opportunity to get short.
The stock market bottom in June 2012 is an example of typical pattern, as the Spyder Trust (SPY) retested its highs in early May, before dropping sharply to the May 18 low of $126.06 (see arrow). The SPY then rebounded sluggishly for the next seven days and came close to the 20-day EMA at $130.56. It was also unable to move above the 38.2% Fibonacci retracement resistance before the SPY turned lower. It eventually dropped to a low of $123.72 in early June, which was accompanied by the formation of bullish divergences, as shown on the chart.
Some may have been looking for a similar setup this time, as stocks did stabilize after the February 3 plunge, but just two days after the Wednesday low of $173.71, the SPY had already closed above its 20-day EMA, as well as both the 38.2% and 50% retracement resistance. Those stubborn bears that held onto their positions until last week were probably stopped out last Tuesday or on Thursday’s surge. Many who, understandably, were looking for a more serious and long lasting decline were disappointed.
As of last Friday’s close, there had been significant improvement in many of the technical studies but there was not enough evidence then to confirm that the correction was over. The further improvement by the middle of last week indicated that the worst of the selling was over.
It was the weak manufacturing data out of China that started to spook the markets last month. As was reported by Reuters on January 23, “Activity in China's factory sector contracted in January for the first time in six months.” Stocks closed lower that day and the market gapped lower the following day.
Economists and analysts are often skeptical about the data out of China, so while the 10.6% jump in January exports may have boosted stocks, many were still skeptical. It seemed to conflict with the weaker data out of South Korea and Taiwan. Of course, investors should never change their strategy based on a headline or a few data points, as emotion is an investor’s worst enemy.
Despite the doom and gloom over China, the weekly chart of the Shanghai Composite shows that it is currently trading well above the 2013 lows of 1850. It is also above the longer term support from 2004 that is in the 1800 area, line b. A strong close above the weekly downtrend at 2400, line a, would be a good sign.
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