- So You’re Saying You Are Triggered by Shampoo? The market, according to old school technical analysts, might be about to take a hard left turn downhill
- Of course this sentiment […]
So You’re Saying You Are Triggered by Shampoo?
The market, according to old school technical analysts, might be about to take a hard left turn downhill. Of course this sentiment assumes a potential forecast here that may be inappropriately early, but it demonstrates the usefulness of knowing something about technical analysis. After all, if you were about to lose a trillion dollars, wouldn’t you want to be warned about it in advance? Friday’s charts might have just done that. The S&P 500, as tracked by State Street’s ETF (SPY) could be headed over a cliff.
Is there a fundamental reason to expect this scenario to play out? Maybe, but not one where you could specifically say just how intense it might be in a period as brief as, say, the next six week. That kind of forecast comes exclusively from the pages of old school technical analysis in the form of a Head and Shoulders pattern.
Sure your analyst friend might walk up to you in Rancourt Black Shell Cordovan wingtips, or 120 pump patent Louboutins, within the shadow of a Harvard degree, and tell you to stop talking about shampoo trades in polite company. But in your best Happy Gilmore voice, you can simply say: “If I saw myself in clothes like that I’d have to…” Scratch that. Better just hand them this chart along with the next two.
Volatility Whipping Back and Forth
Of course no one knows the future, but if Shakira can get paid for saying Hips Don’t Lie, surely an option market maker should get paid for pointing out that the CBOE Volatility Index (VIX) doesn’t either. The option markets do the work of putting a price to anticipated risk. When traders pile into put options on the S&P 500—basically buying crash insurance—the market’s fear meter perks up. Lately the VIX isn’t just twitching, it’s swinging as wildly as the aforementioned singer’s midsection.
Two items of interest jump out from this chart. First, the VIX has been trending higher for several weeks. The first of those weeks SPY prices were trending higher. Second, VIX levels may not have yet found their top since the latest swing has yet to close below a 50% retracement.
Historically VIX remaining above 20 is still a bearish sentiment. The 50% retracement wouldn’t even make it below that level. Therefore it appears there is a good chance the selling isn’t done yet.
Digital Currency or Chicken Little?
Surely you’ve heard that funny saying that goes “If cauliflower can be pizza, you can be anything!” It makes you laugh a lot more than it makes you optimistic. I’m guessing the market felt something similar when someone, somewhere probably said, “If Bitcoin can have a two-trillion dollar market cap, surely our 401(k) is safe, right?”
Um, actually no. This logarithmic chart kind of masks the coming pain, so you have to look close at the numbers.
Head and Shoulders patterns don’t truly forecast that prices will fall. Mostly they document when they have already fallen. The degree with which a Head and Shoulders pattern rightly calls out a pending crash in price is only slightly better than random. The pattern, especially as it develops, is a much better indication that a trend change might be underway.
When this indication appears and is accompanied by related fundamental trends or intermarket pricing, it can be a highly useful signal to take protective measures in your portfolio. This pattern points to the possibility that Bitcoin could trade for under 50k by year’s end, wiping out more than a trillion in market cap compared to recent highs.
Bitcoin has surely been a solid indication of risk sentiment among traders and investors over the past eight years. When many bitcoin holders stop thinking about holding on for dear life and start thinking that it is time to let go, you have to wonder what is going on around you. You have to ask why now?
It is prudent to ask, is this a coming crisis? Or a great opportunity? Right about now the charts are telling us to steer carefully and avoid people whose shoes cost more than a sports car’s lease payment.
Gordon Scott, CMT is a former managing director of the CMT Association and a current member of the Investopedia Financial Review board. He has over 20 years of experience as a coach and trader in securities, futures, forex, and penny stocks. He is a co-founder of Edge Finder. Learn more at https://myedgefinder.com/.
Shared content and posted charts are intended to be used for informational and educational purposes only. CMT Association does not offer, and this information shall not be understood or construed as, financial advice or investment recommendations. The information provided is not a substitute for advice from an investment professional. CMT Association does not accept liability for any financial loss or damage our audience may incur.
