Technical Analysis Of Financial Markets: Unraveling Market Insights

Technical Analysis Of Financial Markets: Interpreting Market Signals with Precision

Updated Jan 31, 2024

To elevate and enhance this discussion, we will delve into its historical context for not one, but two compelling reasons. Firstly, as the adage goes, those who ignore history are bound to repeat its mistakes. By examining this subject within its historical framework, we aim to prevent any potential repetition of past errors. Secondly, our analysis serves as concrete proof of our expertise and practicality – we speak the truth and embody it in our actions. Our approach showcases that we talk the talk and walk the walk

Should investors worry that the markets are generating several dangerous signals

Money moves into defensive stocks, usually when the market is uncertain. Also, the energy sector carried the market up during its last leg, and that’s precisely what happened; the energy sector was the driving force behind the highs the Dow set this year, and it could potentially push the Dow to test its highs one more time.

A healthy financial sector is one of the necessary ingredients for a bull market. In 2009, shortly after our smart money indicator generated a buy, financials exploded upwards. In 2010, their rate of ascension was mediocre to non-existent compared to 2009; coincidentally, this was around the same time we turned neutral on the market. At present, this sector is underperforming. This underperformance can be seen in the one and three-year charts of XLF (the Financial ETF).

A Fascinating read: Does Technical Analysis Work? Unveiling The Truth

In the one-year chart of XLF, the uptrend has been violated, and it is now testing crucial short-term support at 14.75. XLF topped out in Feb, while the Dow rallied until May before putting in a top. If the financial sector had been healthy, it would have rallied in Unison with the Dow. Historically, for a market to move higher, the financial industry or the housing sector has to be in good shape. The housing sector is in the doldrums, and the financial industry is far from healthy.

The three-year chart reveals how bad things are. XLF topped roughly when the smart money indicator’s buy signal turned neutral. As of April 2010, XLF has done nothing but trend sideways. A weekly break below 13 will be a strong warning signal that the market is close to breaking down.

Technical Analysis Of The Financial Markets: A closer look at JPM

If you look at JPM’s chart, the pattern is worse. It topped out towards the end of 2009, and since then, it has been trading in a very tight range. This is telling because JPM is the nation’s second-largest bank, and this chart clearly illustrates that the market does not think JPM is out of the woods yet. The graph of Bank of America, the largest bank in the nation, looks even worse.

Last week, we had a 9-1 down volume day; the down volume was nine times that of the up volume. If the market has experienced a firm correction, this is a bullish development as it is a sign that the last players are panicking. As the market is far from oversold and trading relatively close to 2-year highs, this has to be viewed as a bearish development. The only way it can be neutralised is if we have a 9-1 up volume day; here, the up volume leads the down volume by a factor of 9. However, remember that one should never fear stock market corrections or crashes, and this article clearly explains Why market crashes are buying opportunities

Finally, for the first time in many months, our V Index has experienced a slight drop; V readings dropped from 2140 to 2135. It is too early to tell if this is a trend change, but the markets will remain very volatile until they drop to or below 2000.

Technical Analysis Of The Financial Markets; The Intermediate Outlook

The Dow is at a precarious point; it must turn around shortly or risk breaking down. A few factors indicate the Dow is getting ready to mount a rally from these levels. If the SP 500 and the Dow cannot stabilise at current levels, they could test their March lows, 1250 and 11500. If this occurs, it will confirm that the market has already topped and that any rally from these levels will lead to a lower high.

Dumb money has started to become increasingly hostile, the premiums of puts are rising, and the market has not closed down on a very high volume day. For example, the market closed in the red on a volume of only 4.02 billion shares. Volume continues to rise slowly on down days, but there has been no spectacular surge in volume yet. Finally, the dollar could potentially test its lows, and if this takes place, it will provide the fuel the Dow needs to rally.

Traders who open up long positions and are getting nervous can close all the positions, showing a profit.

Conclusion

From a long-term perspective, the Dow has hit all its targets, and long-term traders should be out of the markets; they should only get into Strangle plays, short positions, and maybe sell put options.

Until a full sell signal is generated, we believe the best strategy is to open up a strangle position. When the markets issue a sell signal, we can start to scale into put options only. So far, we have five strangle positions and are actively scouring the markets for more plays. Remember that these plays will bear fruit after the market experiences a big move; the direction is not essential. We have over one year on these options, so the market seems unlikely to trend sideways for over 12 months. With such high V readings, a strong move is bound to occur sooner or later.

Originally published in May 2015, this article is continuously updated, with the most recent update completed in Dec 2023

Random Stock Market Reflections

When viewed from a different angle/perspective, life resembles the art of investing. Therefore, it is prudent to apply the same strategies employed to enhance one’s prospects in the market to one’s overall life journey. However, as we strive for financial stability, devoting attention to self-improvement can become increasingly challenging. Thus, let us explore several measures that can be taken to elevate our economic prospects in the forthcoming years.

A successful investment strategy involves a powerful blend of mass psychology and technical analysis when investing. By understanding the crowd behaviour of market participants, one gains valuable insights into the market’s pulse. Market psychology plays a pivotal role in identifying trends; the rest becomes relatively straightforward once these trends are identified. Additionally, incorporating the fundamental principles of contrarian investing can elevate your trading skills, especially when combined with the crowd’s wisdom and technical analysis.

Lastly, maintaining a comprehensive trading journal is invaluable in gaining insights into your mindset and crafting a robust battle plan to confront any challenges.