How to Spot 3 Key Market Turning Points
Your best trades are made at key turning points. You just have to know how to spot them…
The market was tanking Wednesday morning — that much was obvious. But it was also nearing its first potential support area that could be a stopping point for the current correction.
Today, you need to toss out all of your usual indicators. Instead of obsessing over earnings or the performances of individual stocks, I want you to instead take a look at a simple chart of the S&P 500. If you analyze the series of lines I have drawn, you will have a clearer picture of the market. Hopefully, you’ll also be able to plan your next trading move.
Here’s a daily of the S&P:
You already know that the uptrending channel (not pictured) was broken last month as stocks moved lower. The blue lines I’ve added to the chart are Fibonacci levels, the middle three being 38.2%, 50% and 61.8% retracement levels from the market’s recent peak. These are the three areas you need to watch.
Before I get into the details of this analysis, I want to make sure that you understand how to use the Fibonaccis. The first rule is not to get caught up in the market precisely obeying these lines. They are not hard-and-fast rules. Fibonaccis are used as guides for what the market might do — not steadfast predictions. What we like to look for are other levels of support that coincide with the retracements. 1,400 is a perfect example. You can look back to August and see where the market established 1,400 as a short-term area of significance. The 38% retracement lines up almost perfectly.
This marks our first potential reversal point. It’s significant because the Fibonaccis line up with horizontal support and a round number: 1,400. Traders and investors will place an added significance to this level.
What does this tell us?
If stocks hold 1,400, we can expect a short-term bounce. If the S&P cannot hold 1,400, we should look for stocks to move lower and potentially test level 2 or 3 on our chart. A 50% retracement would take the S&P right back to its 200-day moving average — another area that has previously acted as support. Here’s yet another area where the market might stop moving lower — and when you might potentially look at getting into some new trades.
You can use these retracements to plan potential long and short trades. You should look to buy stocks when they move higher off support and sell them when they break down below. More importantly, do not make the mistake of diving headfirst into new short positions when the market nears these key levels. That’s a good way to lose your money if the market quickly turns higher.
One final note: You shouldn’t use these retracement lines to trigger any new buys or sells. They are simply a guide. We’re not trying to predict. We simply want to plan for whatever the market might throw our way.
As I always say, patience is key. Don’t trick yourself into making wild predictions about the market moving sharply higher or lower here at our first potential pivot point. Wait for the action to tell you which way you should be trading.
Greg Guenthner, CMT
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