We generally use the S&P chart for stock and options positioning, yet the NASDAQ may be a preclude to a topping pattern here. Often we hear of wedge and triangle patterns that magically fore-tell of a breakout or correction. Yet we should be cautious on trading any pattern alone, as often they form randomly and by themselves can not be taken at face value.
However they also can provide some insight into order flow especially after large moves one direction or another. After the selloff in December the market has recovered the majority of the losses trading within 8% of its all time high. This is where we would look for a lower high or a double top. This late into an economic cycle and after a decisive market selloff we would expect to see a pullback before pushing to a new high, or as a continuation of a broader correction.
What the wedge is telling us is that follow through from buyers is starting to stall out. This is evident with the broader trend channel having a steeper slop than the fractal trend. IF the market pushes through this lower trend line we are likely to see a push lower. Initial support is 6700 but it would not be out of the context of the structure to test 6450 or even look for a double bottom. So where would we see some more evidence of where we can expect to position?
Pulling back to the broader weekly chart, we could be entering a range bound market. Short of having a another financial crisis in the near term we could simply see the market enter a broader range before breaking one direction or the other. We can look for long positions at the lower end of the channel around 6400 and look to sell calls against these positions near the 7200 level.
Keep in mind range bound markets do not last forever but there is a good possibility that we retest the lower range and make an attempt to push higher before we see a major correction. Anything can happen but after such a strong run since 2017 we expect the market to at least pause and enter a range bound market for some period of time until there is a catalysts to move it one direction or the other.
We often focus on the worst case scenario, another financial crisis or prime loan bubble, maybe it is the Real Estate market in China. However we are ignoring that as we enter the era of 5G, AI and the IoT new products will create new wealth and growth. There are no rules for markets and there is nothing that prevents another multi year bull run, however at some point even the strongest bulls need to take a breather!
We are short in the near term to clarify. This is not to imply a financial disaster like 2008 like many are calling.
However they also can provide some insight into order flow especially after large moves one direction or another. After the selloff in December the market has recovered the majority of the losses trading within 8% of its all time high. This is where we would look for a lower high or a double top. This late into an economic cycle and after a decisive market selloff we would expect to see a pullback before pushing to a new high, or as a continuation of a broader correction.
What the wedge is telling us is that follow through from buyers is starting to stall out. This is evident with the broader trend channel having a steeper slop than the fractal trend. IF the market pushes through this lower trend line we are likely to see a push lower. Initial support is 6700 but it would not be out of the context of the structure to test 6450 or even look for a double bottom. So where would we see some more evidence of where we can expect to position?
Pulling back to the broader weekly chart, we could be entering a range bound market. Short of having a another financial crisis in the near term we could simply see the market enter a broader range before breaking one direction or the other. We can look for long positions at the lower end of the channel around 6400 and look to sell calls against these positions near the 7200 level.
Keep in mind range bound markets do not last forever but there is a good possibility that we retest the lower range and make an attempt to push higher before we see a major correction. Anything can happen but after such a strong run since 2017 we expect the market to at least pause and enter a range bound market for some period of time until there is a catalysts to move it one direction or the other.
We often focus on the worst case scenario, another financial crisis or prime loan bubble, maybe it is the Real Estate market in China. However we are ignoring that as we enter the era of 5G, AI and the IoT new products will create new wealth and growth. There are no rules for markets and there is nothing that prevents another multi year bull run, however at some point even the strongest bulls need to take a breather!
We are short in the near term to clarify. This is not to imply a financial disaster like 2008 like many are calling.