What Will Markets Do Next? Let’s Consider the Charts and Plan a Strategy

Bounce action continues on Wednesday, but the action is V-ish, and the indexes are starting to run into overhead resistance. V-shaped bounces after the corrective action we have seen in the past week are hard to trust, but in recent years, they have become more common for reasons that are a bit murky.

The conventional wisdom is that a V-shaped move should not be trusted because trapped bulls will be looking for an exit as they move closer to breakeven, and bears will remount shorts as resistance levels approach. If that doesn’t happen, then FOMO and a short squeeze can make the V-shaped move even more "V-ish."

I’m not overly optimistic about the resumption of an energetic bull market right now due in part to the chaotic macroeconomic situation and also due to the problem of negative seasonality. I think we’ll have some good trading opportunities, but I don’t expect a strong market uptrend to lift the broader market.

Charting the Market

I spend a considerable amount of time every day looking at hundreds of stock charts. Rather than just looking at index charts, I formulate my view of the market based on the overall health of hundreds of individual charts. If I can find a lot of good-looking chart setups, then I will consider it a bull market. If you don’t see many, then it’s a bear market.

There are always opportunities, but the level of opportunities will vary greatly depending on market conditions. Currently, none of the indexes have very good charts. They are seeing V-shaped oversold bounces and have resistance. Whether they can overcome that problem, we will have to wait to see, but I do not see any compelling reason for being long indexes right now.

Unfortunately, the recent corrective action has done quite a bit of damage to many individual stock charts as well. Many have broken support and now need to consolidate and rebuild a foundation from which they can work higher. There are very few names that are setting up for breakouts, and the number of stocks hitting new highs was less than 100 on Wednesday morning.

How I'm Playing Things

My strategy right now is to dump some of the names that are not seeing a good bounce. If they can’t bounce at this point, then the risk of downside is enhanced, and I’d rather watch with cash on hand for a potential reentry in the future.

Before I add names that I like, I want to see some support, and then I’ll look for opportunistic entries. I’m not trusting breakouts to show sustained momentum, and I am more inclined to sell into strength rather than chase it.

Basically, I’m looking to raise further cash, but I’ll closely track favorite names and buy weaknesses if it looks like there is potential support.

This is a dangerous market environment, and there aren’t many good-looking charts in which to buy.

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At the time of publication, Rev Shark had no positions in any securities mentioned.