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One of the signs that we’re in a good or bad market can be seen on the daily charts…

It is said that, when the stock market opens strong, but finishes weak, this is evidence that we’re in a weak, unhealthy bear market.  On the other hand, when the stock market opens weak, but finishes strong, this is evidence we’re in a healthy bull market. 

Why do they call them “Bull” markets and “Bear” markets?  Well… because bulls attack with their horns from the bottom-up, and bears attack with their claws from the top-down!

The chart below shows the price action after Moody’s downgraded the U.S. credit rating.  As you can clearly see, the market gapped down big (it doesn’t get much weaker than that!).

Then buyers stepped in, pushing up prices thru midday, followed by an intra-day pullback that had the market dancing around its open, only to see buyers take control at the end of the day, pushing the S&P500 to close positive on the day.

Another way to tell how healthy the stock market is – but this time, on a longer-term timeframe – is to observe:

1. Price movement
2. Moving averages, and
3. Momentum

Moving averages are a way of smoothing out the choppy, shorter-term swings over a period of time – and you can pick any time period you want. 

For instance, below, I used a 200-day moving average (200MA) – and I used a blue shaded area because, whenever the market (or an investment) is below certain moving averages, I like to use the analogy that it’s “below water,” and investments, much like humans, can spend a short period of time below water before they start drowning!

However, observing the market today, it’s most certainly “above water.”  In fact, it gapped up (i.e., it opened much higher in the morning after a lower, previous day close), above its 200MA, and has continued to follow through over the last five days.

Then, in the lower pane, you can see a momentum indicator called RSI (Relative Strength Index), and in this case, I’m using a 14-day RSI, which means it has a 14-day look-back period. 

RSI shows us whether the bulls or bears are in control from a momentum perspective.  When it crosses below 30, it’s considered to be in a “bearish regime,” until it crosses above 70, after which, the investment in question (in this case, the S&P500) is considered to be in a “bullish regime.”

I usually wait till the end of the month to create my “Inverse Traffic Light” chart, but it seemed to “fit” today, so here goes nothing…

Similar to moving averages, you can draw horizontal lines of what we technicians call “support” and “resistance.” 

Think of “support” as a potential floor below your feet below which, things are expected to get worse.  Conversely, think of “resistance” as a potential ceiling over your head, above which, things are expected to get better.

These metaphorical lines-in-the-sand are meant to be plotted at major highs and lows.  In other words, we plot these lines at places where either buyers stepped in, took over, and started pushing prices up… or other places where sellers overwhelmed the market and started pushing prices down.

Like anything in life, the more you do it, the better you get, and you’ll be fascinated by how many of these areas tend to relate to one another.  Many times, it’s almost like a “market magnet” pulls prices to these lines of potential support and resistance, until they’re broken, and that’s when you really need to pay attention.

Below, in my “Inverse Traffic Light” chart:

• The bottom of the GREEN ZONE is marked by the summer ’24 highs, the fall ’24 lows, the pre-Strangulation Day recovery attempt, as well as this past week’s pre-gap price level.
• The top of the DANGER ZONE is marked by spring ’24 lows, as well as the Tariff Crash lows.

I also threw in a little “extra” line of potential support at the March ’25 lows, which also happens to be right around the Strangulation Day cascade, a point during which, the market fell -10.5% in 2 days… the 5^th-worst two day performance since 1950. 

…and if you just can’t get enough of this nerdy stuff, you can read more about that in yesterday’s Investopedia Chart Advisor report by clicking HERE.  😉

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Shared content and posted charts are intended to be used for informational and educational purposes only. The 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. The CMT Association does not accept liability for any financial loss or damage our audience may incur.

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