Indices significantly above long-term MAs, pullback risk high
It may not mark ‘the’ top, but should give traders some volatility to trade
INDICES SIGNIFICANTLY ABOVE LONG-TERM MAS, PULLBACK RISK HIGH
On Friday, I discussed the potential for the Nasdaq Composite to treat the 10k threshold in 2020 as it did 5k back in 2000 – a major top. But before possibly seeing the 10k mark achieved we may first see a correction develop. The NDX is currently trading nearly 2.7 standard deviations above the 200-day MA, an impressive feat to say the least. Only about 0.6% of days since the 2009 low has the index traded at such an extreme to the long-term moving average. Each time extremes of this magnitude were record it not long after coincided with a corrective move. The last instance was in January 2018. The S&P 500 and Dow Jones are sitting in similar situations to a slightly lesser degree. A reversion back towards the 200-day MA seems reasonable given where we are today. It is possible some of the overbought conditions are worked off via time, but there is almost certainly going to be some relatively steep losses as part of the corrective sequence that give shorts the upper hand. But before going out and trying to pick a top, it’s a good idea to wait for some confirming price action. That is, wait for a sudden break lower that indicates a willingness by market participants to hit the bid, something we have seen none of lately. We might be near a pullback in terms of time, but the final push higher can be sharp and painful if caught on the wrong side. With a sudden break and downside price action, higher volatility will help give better traction for those traders looking to take advantage of short-term swings. Given that January often brings a lot of participation and the market is primed to move, the next few weeks could be an exciting frame.
Hey all, I realize this is a bit of a read but I figured hopefully some of you might get something out of it. I've recently started a blog on trading as I love writing and it's one of my passions. Regardless I'm not huge on self promotion so I'll simply post it here and if you're interested you're welcome to PM me for the link otherwise I'd love to start a conversation on the topic here! Please share your thoughts on the subject, I definitely don't claim to be an expert, these are just some observations of mine. =) The general consensus within the Forex community on the understanding of psychological levels is one that is both very basic, and relatively black and white. I would argue that in my trading I have discovered psychological levels tend to be much more encompassing, slightly more subjective, and incredibly useful in helping traders determine overall market sentiment and trader bias under the direction of accompanying techniques. Although psychological levels as a trading tool are relatively misunderstood from a technical perspective, the fact remains, when employed properly they can be one of the few truly effective leading indicators under the confirmation of post candle-close analysis. Keep in mind the term "leading indicator" is one I use with caution as I find all too often technical analysts refer to the term in situations where it ought not be. If you take the concept of a true "leading indicator" at face value - "an indication of potential price movement [continuation, congestion, or reversion], without preconceived reference to prior movement" it's clear that such an indicator can be argued if not impossible, at the very least extremely elusive. This is where an area of interpretation comes in as to what is considered "leading". For most, "leading" constitutes a level or price or volatility in which previous market dynamics have suggested future pattern. Levels of support and resistance, trend continuation, Fibonacci sequence, pivot points, and psychological levels often act as such. Every one of these methods aside from psychological levels rely entirely on the recognition of former pattern and or the examination of price periods for the purpose of predicting future movement such as pull backs and price extensions. As a result I think it's safe to say you would have to assume there must be a catch. As we all know, there's is clearly no such thing as a holy grail so where does the psychological level fall short? Psychologicals work entirely on the assumption that fellow traders and institutions will be looking at key levels as areas of interest. This is the primary reason these levels can not be used to predict price movement, they are simply useful as a potential indicator of interest from coexisting market participants. As a result, if you intend to take advantage of this information, it's important to ensure you don't fall into the trap of viewing these levels as points of support and resistance in the same way you would after plotting a range as they simply are not. Unlike the majority of indicators, each occurrence of a psychological level should be seen as an independent event. For those familiar with the equities market I've found the one event that best mirrors this phenomenon is that of small-cap "earnings" - a specific day and time within the financial quarter in which a stock is expected to react according to its results and future projections. Unlike calendar events within the currency markets, these small-cap events are not large enough to cause significant market movement among associated instruments. I think it's of importance to keep in mind that psychologicals do not necessarily have to refer to specific price points at which heightened market participation is expected. If rich player participation is in fact the key factor in determining what is a psychological indicator, other market occurrences should be of value. Timing, for example, should be of interest. The open and close of particular sessions in relation to volatility expansion and contraction. Fellow participants expect these events and address their positions or positioning for the upcoming session accordingly. Once again the particulars of each event are independent but the expectancy of a change to some degree is nearly guaranteed. Trading psychological levels can certainly have value if utilized properly, but exactly like all other indicators it's crucial to have a tangible understanding of all elements of the tool long before you throw caution to the wind (not that you ever should). Unlike a moving average or an oscillator where you can examine the pieces that make up the indicator, psychological levels require you to dig a little deeper if you hope to effectively make use of them within your trading plan.
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