A Case For A Bearish Reversal

stock market training

Earlier this morning, I presented a case for some near-term bullish activity during the Live edition of Filthy Rich, Dirt Poor.  If you missed it, there’s a replay link at the end of this article.  

Here’s a brief recap – we have an end-of-the-month, quarter, and half-year rebalancing that will need to take place from pension funds that have been sitting on record levels of cash.  They will need to buy shares in order to keep the funds aligned with their yearly goals.  

We had a bit of sector rotation with Energy getting hit over the last two weeks while sectors for Communication and Consumer Discretionary have been big winners.  These sectors can be a sign that investors are willing to take on more risk in their portfolios.

Then something happened in the market today and this one chart may be presenting a different side to the story.  This chart pattern may be signaling the next leg down is right around the corner and now is the time to get ready.

What’s the chart pattern?  Keep reading…

I could spend hours talking about Fibonacci Extensions and the Fibonacci sequence of numbers, but the brief version is that there is a sequence of numbers that creates ratios that are common in everyday life.  Believe it or not, the same ratio that photographers use to set up shots is also used by some traders who follow these ratios to help determine profit targets and pullback levels.  It’s also referred to as the Golden Ratio.  If you’re a numbers geek like me, there are some stock market training courses that talk more in-depth about the Fibonacci sequence.  Well, read the rest of this article first. 

Fibonacci Extensions use the ratios and are drawn on a chart by using three points, marking price levels of possible importance.  These points are often drawn at swing high and swing low points.  

The extension lines use the ratios and the points to determine where the next price wave is likely to go after a pullback.

Common Fibonacci levels are 38.2%, 61.8%, 100%, 161.8%, and so on.  There are other numbers, but these are the key ones to focus on for now. 

Let’s take a look at the chart of the S&P 500 index, using the ticker, SPX.

The market high was made in January of 2022, and right after started a sell-off (left side of the chart) and it followed the downward trend line until about mid-march.  We saw a relief rally that took out the previous two swing-high points.  I’ve labeled this event as point A on the chart below.

The market continued the next leg down with a series of lower lows and lower highs.  This pattern was once again broken toward the end of May.  Once it was broken, we then go back and identify the most recent swing low.  I’ve labeled that event as B on the chart.  

Of course, we didn’t know about the next swing high (point C) until after the market started going down, but once that happened, we could go back and add the final dot to our graph.  

stock market training

All major charting platforms have Fibonacci extensions, and once you’ve identified where you want to place your three points, it’s just a few mouse clicks and you’re done.

And now look at how the 61.8% extension level (which you could have added once you had an idea for point C) acted as resistance and the market bounced right off that line!  If you were aggressive in placing your C dot a few days after that high with now followthrough, the 61.8% extension would have acted as your profit target.  In this case, it was spot-on.  Pretty neat! 

stock market training

Now, if you’re like me when I first learned about this, you might be saying, sure, but hindsight is 20/20 and you didn’t know about point C until the market started coming down, and then maybe it was too late to use the 61.8% extension as a profit target, and so on.  That is true, but there’s a lot you can learn about how to anticipate pivot points to use as your Fib Extension points, but that would take way too long to discuss right now.

Next is the Fibonacci Retracement tool, which is similar to Fib Extensions, but it only uses two points and helps predict the levels we might retrace back to from the current trend.  

Let’s take a look.  Using the Fib Retracement tool, I set my points at point C and the most recent low.  The retracement levels are in green and should give us some insight as to where we may go from here.  Remember, we’re in an overall downtrend, so we’re retracing back up before we head back down.  

stock market training

What the chart above is showing is that from point C to the most recent low (showing a short-term downtrend), we’re likely to retrace back up to the 61.8% Fib Retracement level, which is at $3970.99.  Now, look to the left and see where that line goes.  It’s right near the gap down from a few days ago.  

The way I read this is if we have any strong conviction to the upside and breakthrough that $3970.99 level, we’re most likely to go up and fill that gap, up to $4020, and could be back on our way to retest point C.  That’s the 7% up scenario I discussed this morning.  

If we show signs of weakness and we see continued resistance around $3970.99, that’s our bearish case for a new leg down.  Not only would it not fill the first gap down, but it wouldn’t break through a key Fib Retracement level and that is a very bearish sign in this case.

Today might have been a profit-taking day from last week, but if we don’t see some buying strength at these levels, be prepared for a drop to retest the most recent low.  

If you missed the Filthy Rich, Dirt Poor live edition on Monday, you can watch a replay here.

If you have any questions, comments, or anything we can help with, reach us at any time.

Email: [email protected]

Phone: (866) 257-3008

 

Jeff
Guest Writer, Filthy Rich, Dirt Poor
Editor, Wealthy Investor Society

Can Clean Energy Renew Your Portfolio?

Can Clean Energy Renew Your Portfolio?

johnh
On August 8, 2022

As we look for trade ideas, the U.S. government just handed over a potential big win for one industry. Will we see a boost to the clean energy stocks after the Senate voted to unlock nearly $370 billion this past weekend?

Will Payrolls Push The Fed To Take Action?

Will Payrolls Push The Fed To Take Action?

johnh
On August 7, 2022

What does all of this mean for the future? Are the jobs reports good or bad?

Keep reading to find out the key levels for the S&P 500 and what reports are likely to move the markets this week.

Job Market Remains Tight As Jobless Claims Increase

Job Market Remains Tight As Jobless Claims Increase

johnh
On August 4, 2022

To close out the week I have a trade idea for you with a potential 44% return in the next 43 days.

Get Today’s Trade Idea (and more)

FOMO Hits Market After Strong Earnings

FOMO Hits Market After Strong Earnings

johnh
On August 3, 2022

We could see another strong month ahead for tech and there’s one symbol that you may want to add to your trading list.

Keep reading to learn more about the one symbol that could have a strong August.

Consistent Income Using One Ticker

Consistent Income Using One Ticker

johnh
On August 2, 2022

As the markets remain relatively flat, theta decay is your friend this week so I thought I’d write about a trade that has been showing remarkable accuracy lately.

This one trade has a 90% accuracy rate. Keep reading to find out more.

How Stable Is The Job Market?

How Stable Is The Job Market?

johnh
On August 1, 2022

It wasn’t too long ago that the market was reacting (or overreacting) to every piece of news that was published. Over the last month and a half, the markets have settled down some. That can be seen from the VIX (volatility index) which has been steadily decreasing since the mid-June market lows.

Don’t Call It A Recession

Don’t Call It A Recession

johnh
On July 31, 2022

That begs the question: if the market is forward-looking, why do we put so much attention to GDP numbers that are identified and then reported after the quarter is complete?

Is This Really A Recession?

Is This Really A Recession?

johnh
On July 28, 2022

The Mediots Are At It Again

As we’ve explained over the last few months, it was likely that the U.S. economy would meet the ‘technical’ definition of a recession (two or more consecutive quarters of negative GDP).

Three Dividend Stocks To Buy After Yesterday’s Fed Meeting

Three Dividend Stocks To Buy After Yesterday’s Fed Meeting

johnh
On July 27, 2022

It’s official, the Fed increased interest rates by 75 basis points for a second straight meeting. Inflation remains high, job growth is slowing, and consumer confidence is at historic lows.

Maybe that’s why investors are rushing toward dividend investing to protect their portfolios. With a recession likely on the horizon, if we’re not there already, and dividend payouts projected to increase throughout 2022, there are three quality companies you should consider for your portfolio.

Top CEOs Are Saying This About The Upcoming Quarter

Top CEOs Are Saying This About The Upcoming Quarter

johnh
On July 26, 2022

What can learn from the major companies that reported earnings?

Alphabet (GOOG/L) released earnings and missed overall, but their ad revenue beat expectations so their stock went up after hours. Microsoft (MSFT) missed on cloud revenue and ad revenue and their stock went down. Great.

PREV NEXT

Contact

267 Kentlands Blvd #225
Gaithersburg, MD 20878

P. (866) 257-3008
(Monday-Friday 9:00 AM-5:00 PM EST)

E. [email protected]

Products

About

Publisher of actionable and proven strategies and tactics to help investors build wealth and reach seven-figure portfolios.

Receive the latest news

Subscribe To Our Daily Newsletter

Get notified about new articles, special events, training, and much more

Like What You See?

Leave your info below to get more options and trading ideas to your inbox

Yes, send me news to my inbox.