Morning Scoop
It’s finally Friday, and I’m sure the market is extra ready to relax this weekend after a brutal week filled with negative news left and right. It was not easy to navigate, and if you don’t have patience in bear markets, they can wear you out until you give up.
Markets
- News: Banks were down yesterday, and Silicon Valley Bank had an even worse day, closing down 60%.
- The bank is now trading 63% below yesterday’s close, and a stock that was trading in the $300 range is now worth only $39.
- In these strange times, it’s important to proceed with caution and stay small because it’s impossible to predict what will happen next.
- S&P 500 futures update: This morning, there hasn’t been much change. Fridays can be slow, especially with the weekend approaching, and I don’t think many people want to hold their positions overnight in these uncertain market conditions. Although we’ve experienced a bit of a bounce, I’m hesitant to trust it. On the daily chart, we broke and closed below the 200-day moving average, which is not a bullish sign.
- Forecast: I anticipate that volatility will continue to increase, given the abundance of negative news circulating in the market. The current situation seems to be urging the market to drop, yet it’s doing everything it can to stay up. I’m uncertain about which side to trust – the bears or the bulls – so for now, I’ll be watching them fight from the sidelines.
Chart Analysis
Keep it Simple stupid
If I had to give one piece of advice that has saved me from making poor decisions or overcomplicating things, it’s a simple reminder that a kind neighbor, Big John (rest in peace), taught me long ago.
We tend to overcomplicate everything, perhaps because we believe that if we have a comprehensive understanding of a particular topic, we will master it and become experts. While this isn’t entirely wrong, we often lose sight of the purpose and simplicity of what we’re doing.
Identifying the Trend
In our previous discussion, we talked about the various trends that can emerge in price. If you missed it, you can click here to access the newsletter and revisit the topic.
Regarding AMD, I decided to remove the Bollinger bands and moving averages from the chart, leaving only the candlesticks. To provide some guidance, I added the 200-day moving average.
By doing this, I can clearly see that AMD is forming higher highs and higher lows. As we approach the third touch, we see price breaking this trend.
How We Can Apply This
We observe that the price has broken the trendline. However, we now need to determine whether this is a false breakdown or a true breakdown. In the accompanying image, we can see the red arrow indicating the price breaking the range, followed by the next two candles showing an immediate pullback, as indicated by the green arrow. This could suggest a weak attempt at a breakdown.
As a result, you have two options for how to approach this situation. Let’s discuss those options.
Weighting Your Options
At this point, you have a choice. If you see this as an area of interest, it is what’s known as defined risk. We may not be certain about the market’s direction from here, but we have predetermined areas that will indicate when we are wrong for either scenario.
Now, let’s discuss the two options you have: going long (hoping for price to increase for profit) versus going short (anticipating a price decrease for profit).
Assuming that we open within this range, there is a potential play to the long side. We’re currently above the 200-day moving average and still in an uptrend. It’s possible that this could be a false breakdown and the price may continue to rise.
To manage the risk, we can set the stop loss slightly below the lows and aim for a 1:1.5 or 1:2 risk-to-reward ratio.
Assuming that the market opens within this range, we could consider playing the short side. However, it’s important to keep in mind that we’re currently above the 200-day moving average, which goes against the trend. On the other hand, negative market sentiment is in our favor as equities continue to decline.
To manage the risk, we can set the stop loss slightly above the highs of the wicks in this range. We should aim for a profit target of a 1:1.5 – 1:2 ratio and monitor the trade as it progresses.
Conclusion
In trading, we can’t predict with certainty whether the market will go up or down, and learning charts alone won’t magically give us all the answers. However, studying charts can help us visualize and simplify the information, allowing us to identify areas of defined risk.
As you can see, there are opportunities to play this to either side, and many traders may be thinking the same thing today. Regardless of which direction you choose, it’s important to stick to your plan and follow it. Even if you end up being wrong, you’ll learn from the experience.
Wrap-up
As the week comes to a close, it would be a welcome relief to have a break from the recent negativity. Ideally, we would like to see the market hold this area or experience a rally today, but it’s important to manage our expectations. Let’s stick to our plan for the day and approach any trades with caution by starting with a small position to test the waters.
disclaimer
Although I am an investor by profession, I am not YOUR financial advisor. All content and information on this website including our programs, products and/or services is for informational and educational purposes only, does not constitute financial advice and does not establish any kind of financial advisor-client relationship by your use of this website. A financial advisor-client relationship with you is only formed after we have expressly entered into a written agreement with you that you have signed including our fee structure and other terms to represent you in a specific matter. Although we strive to provide accurate general information, the information presented here is not a substitute for any kind of professional advice, and you should not rely solely on this information. Always consult a professional in the area for your particular needs and circumstances prior to making any professional, legal, investing and financial or tax related decisions..