Map of the Day: NASDAQ bulls still under control, at least for the short term

After falling 11% in just three sessions, when technology stocks – including the highest flying FAANGs – were dumped by investors, stocks shot up 3% on Wednesday. It was the biggest gain for the technology-heavy index since April.

According to Mike Lewis, head of US cash stocks traded at Barclays, as quoted in the Financial Times, “activity in the options market may have been responsible for some of the movement in volatility towards the sell-off. which we have just witnessed. "

According to Lewis, a recent reduction in option price volatility suggests:

"The sell-out is probably over – a confirmation rather a correction than a reversal."

Nonetheless, global momentum has slowed down today, with futures contracts hesitating this morning, although lower at the time of writing.

Of course one cannot help but wonder whether technical knowledge supports those foundations.

On Wednesday, the index found support from the highs of July. The fact that the 50 DMA met the daily price shows the importance of this position. Indeed, we are still seeing demand there.

After resisting the 11,000 level in July, once that selling pressure penetrated, it turned to a support on the premise of a technical market dynamic – bears who in early August expected the price to fall from that level, as twice in July happened. Instead, they were forced to cover shorts at a loss, driving up the price.

The painful lesson was taught to bearish traders by the bulls, whose positions were strengthened after making the right bet on the index. Those on the sidelines also finally recognized a viable position and chose it.

This supposed broad support helped the price produce a reverse hammer on Tuesday, whose bullish potential could indicate that if the price rises the next day, there would be a brief push. This was confirmed by Wednesday's higher close.

The activity of those two days may have completed a three-day Morning Star that predicted a sunrise. Strictly speaking, the first candle should have had a long real body and the third should have penetrated deep into it.

Instead, the first candle had a small real body, but because the second candle was so much lower and the third day's price had an exceptional rebound, we consider this pattern to be possibly the same dynamics as a Morning Star textbook. The idea is that bulls have wrested control from bears.

Now that those details have been cleared up, it's time to step back and see how they fit into the bigger picture.

The price fell below the uptrendline yesterday since the lows in March. While that's the first sign of a potential reversal, it doesn't end up being a downleg every time this happens.

Note how many lines had to be redrawn as prices have been rising since the bottom of March. As far as we know, we may have to redraw the trendline to include the recent route before the technical benchmark hits a new high again. This trading pattern occurs when a rally, initially exuberant, becomes more moderate over time.

We don't worry much about trend lines, which are subjective and especially meaningful to technicians who follow them; therefore the price response is limited.

We are much more concerned with peaks and troughs, the essence of what defines a trend. These are constant.

They do not change according to the angle of the time, but rather are fixed on the basis of the price. That's why even non-technical analysts are aware of this. If an investor remembers winning or losing at a certain price, that knowledge can influence his / her decision-making in the future, whether he / she knows about it or not.

Thus, while the peak and trough formation remains in an upward trend, the decline fell below the previous peak on August 6 and fell almost to the previous trough of August 11. While that is not considered a reversal, it demonstrates the weakening trend. Even if the price does not go lower, the falling price may have been part of a top formation.

Still, its current pattern and location suggest that there is a good chance that there will be at least one more jump in the coming days, if not weeks.

Trading Strategies

Conservative traders would only consider participating in this trade if prices hit new highs with strong volume.

Moderate traders may want to consider a small position if the price hits Tuesday lows again to limit exposure.

Aggressive traders are allowed to trade as soon as they have found a good entry point that offers them a positive risk / reward balance that suits their budget and temperament. Here's an example:

Trade Example – Long Position

Input: 11,250
Stop loss: 11,000
Risk: 250 points
Target: 12,250
Reward: 1,000 points
Risk: Reward Ratio: 1: 4

Author's Note: The above section name is & # 39; trade monster & # 39 ;. As such it does not represent the analysis. There are other ways to make this trade depending on timing, budget, character, and temperament. What is essential is consistency and discipline. Winning or losing individual trades does not make you a successful trader or not.

You will not know what works for you personally until you have acted enough to create statistical findings. That requires consistency and discipline. You also can't develop these statistical results if you don't understand what moves markets and how price behaves so that you can react accordingly.

Trade – like any other profession – is not easy money. It takes time, focus, discipline, effort and money. If you don't have all of these, trading is just not for you.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.