How to Gauge Trade Patterns

In the first of the two SPY charts below, we see a steady rally in 2017 where the average month range spanned about 8 points. Then in January 2018 the range more than doubled the average bringing on an overbought signal. It was the last thrust higher that ended the nearly nonstop yearlong rally. The range during the February reversal was nearly four times the norm. It took four months of sideways choppy trade to ease the oversold signal from February’s steep decline. The reason for the history lesson is to prepare for the next few months.

The second macrograph shows the October decline was just as dramatic as the one earlier this year. Subsequently, we should be prepared for very dramatic moves both up and down while the oversold situation dissipates. This phase of choppy trade may last well into Q1 of 1019.

At this point it is not clear if the indexes have cheapened enough to entice buyers. However, if we look back to February and April, we see that buyers became aggressive when SPY dipped below 260. Normally when markets return to old support areas, buyers emerge. If there is any truth to the phrase “patterns repeat in all markets and all time frames,” then the pattern over the few months will be akin to price action that occurred after the February decline. In that case 255-258 should be a solid support area and 280-283 should provide resistance through December and possibly longer. When either of these areas are tested look for changes in your favorite short-term trend indicator. During volatile times holding out for good trade location above and below the market will reduce risk and enhance profit potential.

John Seguin
Senior Futures Instructor
Market Taker Mentoring, Inc.

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