Stock Market Analysis: Catalyst Coming Soon?
This week we began trading after the Presidents day holiday on Monday. In a holiday shortened week, it is a good idea to be prepared for an increase in volatility. This is oftentimes due to unexpected things that can happen on a 3-day weekend where the markets are not open. It may be a good idea to look at exiting trades prior to a holiday weekend. While not essential, it can help us avoid the unexpected movements that happen over a long weekend.
This week ended up as a flat trading week as the markets are in the middle of trying to decide what they want to do next. A bullish move has been the norm for this last year and the markets are having a hard time trying to break the upward movements. A change in direction is typically driven by some catalyst that causes a shift in the direction. This catalyst could be some economic news or other geo-political events that change the economic outlook moving forward. This past week we did see some news on the employment front that may cause some concern moving forward. The Unemployment Claim report came out and exceeded the forecasted number. The expectation was that there would be 775K claims but the actual number came in at 861K claims. The concern with this is that if employment does not pick back up, the markets and overall economy will continue to suffer.
As we look at the overall markets, we will see that for the last year the bulls have been in control of pushing prices higher. After the drop back in March due to the pandemic and closing of most of the economy, the markets have been relatively strong. With that being said, we need to be prepared for the market to have a pull back at some time. We know that the markets do not always go up so make sure you are prepared to take advantage of the down moves once we begin to see this happen. Of course, we do not know when this will happen, just be prepared for when it does.
Today we are going to look at the daily chart of the DJ-30:
In the daily chart of the SP-500 you can see the big drop last March, followed by the yearlong bullish move higher. While there were sometimes in September and October where we saw a pull back, the overall movement has been strong. Notice on the chart that there are two red lines which represent an upward channel that the price has been moving in. If price remains in this channel, we will not see prices begin to reverse. When price moves below this channel, there is a good chance we will see a more significant drop in price. How long or how deep the drop goes is anyone's guess. We just want to make sure that we are looking for evidence on the chart to support our decision to move from a bullish to a bearish trend. With that being said, the current market bias is still to the upside and most of our trades should be taken with that in mind.
Take some time to review your trades to make sure you are trading in the right direction. Then, keep an eye on the price action seen on the chart to make sure you are prepared to change direction as the trends reverse course.
Have a great weekend!
Bill Poulos is a financial educator, former General Motors executive and published author. When he retired in 2001, Poulos and his son Greg founded a financial publishing company, Profits Run, Inc. Profits Run shows beginners how to invest wisely with minimal risk. The company educates investors through various wealth management publications. Automatic Income Engine, Rapid Income Engine, and Premium Income Alert are some of the products implemented by Profits Run to help investors trade smarter with minimal risk. Poulos contributes to a variety of online news sources, providing information on the stock market. Bill married his high school sweetheart, Karen, in 1969. They live in Michigan, where Profits Run is located.