Markets in free fall provide little in the way of guideposts and thus, parking some money on the sidelines is often the only way to prudently reduce unknowns until things settle down.
Corrections and the early stages of a new downtrend never fall into the easy-and-comfortable category and the last three weeks are no exception. When things calms down a bit, the market tends to give us some guideposts to assist in monitoring risk and tweaking allocations. Thankfully, unlike the waterfall chart above, the chart below helps reduce sheep-counting at night.
The look of Wednesday’s candlestick below tells us the session high of 2736 represents an area of possible short-term resistance. The long tail on Monday’s red candlestick tells us the session low of 2603 represents an area of possible support. Thus, we will learn something either way based on how market participants act near those levels in the future.
Use of the upper (UB) and lower bounds (LB) will vary based on how the market behaves in the coming days/weeks (volume, signs of distribution, divergences, moves in the VIX, etc.).
PLANNING FOR THREE MAJOR SCENARIOS
We have to be able to account for three major hypothetical paths for stocks going forward:
A: A sharp bullish push higher
B: A sharp bearish drop
C: Sideways consolidation and whipsaws