I look at hundreds of charts each day. I’ve always viewed the charts as studies of market psychology. What were speculators thinking at a certain important level in the past, and what got them to panic or calm down? Over time, I started to notice when markets resembled markets I’d traded in before. And today, the markets have the look and feel of only a few times in my trading career.
I want to revisit the 20-day moving average post from yesterday because it offers an important lesson, and I kept it in the back of my mind throughout the day. First off, the SPX actually closed back below its 20-day ma by the close, just barely. Considering that “risk-off” markets like Treasuries and the dollar held above their 20-day ma’s, and the “risk-on” markets like stocks (QQQ and IWM also closed below their 20-day ma) commodities (like copper and oil), and emerging market currencies all closed below, yesterday’s price action moved me back to bearish from neutral.
I would note that I haven’t placed one trade in the past 2 days as I’ve watched this unfold. My bias, though, will inform my future trades (and whether I cut my existing ones). And the markets could easily move back to a neutral reading in my mind if price action shifts again. I have no problem moving from bearish to neutral back to bearish over the course of a few days, because flexibility is crucial to successful trading. As the saying goes, “Obstinancy is the strength of the weak.”
But today’s chart is an example of what might have happened in the middle of this week. It’s a chart of the Aussie Dollar in 2008, and while that seems like an esoteric example, I want to use it to illustrate one possible analog for what we’re seeing in stocks right now:
(PLEASE, PLEASE note, I said possible analog. It is NOT my expectation for what might happen, but one scenario from the past that resembles current price action. The value I find in contemplating a scenario like this is that I also know when to change my mind if the scenario does not play out.)
The Aussie Dollar started a steep downtrend in late July 2008, breaking the 20 day moving average and becoming very oversold on the RSI (bottom panel), before finally breaking back above the 20 day ma in late September for the first time in 2 months. In the process, it worked off its severe oversold condition on the RSI (circled in red). That move above the 20 day ma likely forced some trend followers to cut their positions, but the selling was strong enough that the AUD moved back below its 20 day ma within a week, and declined another 20% before breaking the 20 day again in October.
Now let’s look at the SPX for today:
In this case, the SPX broke above its 20 day ma for the first time since early May, but couldn’t even manage 1 full day above it. The last few days also worked off the oversold condition on the RSI. As long as we maintain the downtrend below the 20 day ma, the possible setup is continued selling for another month. Potential Summer 2008 remix? Maybe. BUT I’ll be ready to change my mind again if need be.