Patterns Are Best Interpreted Through the Charts

As a technical analyst, my job is to find the most reliable and predictable patterns out there and make the assumption that they will repeat.  But that is a pretty big leap of faith, isn’t it?  Well, if you follow charts and technical’s you find they represent the very emotions that embody the crowd of players.  Look at any chart and you can see the fear and greed, polarized emotions which exist on a spectrum of where we as individuals often slide from one side to the other.  We all fear losing our wealth but have an insatiable appetite for building our accounts, and will do whatever it takes to make it happen.

Fear and greed are the parameters or limits we can deal with in our quest to interpret price action on a chart.  For instance, we can explain big drops or surges in a stock price simply by observing price action.  On Friday, ULTA was a great example of fear, players running for the hills to get out of the way of this falling boulder.  Last week, TSLA had a big surge at the open on good volume and continued higher all day long, closing at the highs of the session.  No fear on this one, right?  But these are all seen after the fact, right?  I want to see what the ‘right side of the chart’ will look like down the road, and of course that is the trickiest part of all.   There is no ‘secret sauce’ to predicting the future but we can learn from past patterns and trends and put together a reasonable scenario.

One of many patterns I’ve seen this year is on the SPX and VIX (see charts below).  The SPX lately has shown a predictable pattern of bouncing from its daily 20 MA, and on Friday it did just that.  This is the fourth time this pattern showed up and worked, it also occurred several times earlier this year.

So, armed with that information and sitting right there last week, wouldn’t it have been worth a good bet to get long prior to the jobs report?  Okay – hindsight is 20/20, I get that.  But the setup was there and did not fail on previous occasions. What pattern do u see now after Friday’s action?

The VIX has often signaled a spike high but a very quick reversal following, nearly impossible to jump on board. BUT – if you saw the previous patterns develop coupled with oversold conditions (each time this was the case) the markets reversed hard in the face of great fear.  Friday saw the VIX get slammed lower after a recent 28% move up in volatility.

So, is it taking too much of a risk chance to call for a reversal of a short term move to resume the current market trend?  If the shoe fits, you wear it!   Bob Lang