First, aDR happy, healthy and prosperous New Year to you all!
Next, here’s what I’m concentrating on right now in the equities markets — and it’s all jammed into one chart. Let’s look at 7 steps of market evolution since mid 2-18 and then let’s talk about what we’ll do to make some money.

First, the chart:

DR Chart 1
The 7 Steps to Today’s Market

  1. After its lows in early April, the market did a six-month grind higher into October.
  2. Grinding bull markets almost always have really low volatility. On August 9th, the S&P’s 5-day Average True Range (ATR) was 12.67 points. Compare that to more recent activity – last Wednesday, we had a 40 point drop and then a 45 point recovery – all before noon. By midday today (Wednesday 1/9), we saw a 23 point pop follow a 21 point drop. Volatility is waning from its highest mark in late December but it’s still high relative to recent history.
  3. The S&P’s 9%+ drop in December was the worst December performance on record since the Great Depression.
  4. Down Markets = Big Volatility. From the quiet doldrums in August to its highest level in late December, there was a 7-fold increase in market volatility.
  5. So now . . . the market is rattling between resistance at the October and December lows near 2,600…
  6. … and support at the lowest recent lows of 12/24 and 12/26 at 2,350.
  7. The Santa Claus Rally that I wrote about two weeks ago worked again . . . and the momentum has followed through to bring the S&P up to key resistance at the 2,600 level.

Here’s a little more detail on that Santa Claus Rally: from the close of December 21, 2018 to the close of January 3, 2019, the S&P 500 gained 1.3% — even with the big down moves on the first and last days of that seven day period:

DR Chart 2
The Bottom Line

We need to remain nimble and prepared to play both sides of this market by taking profits on drops (using short sales and puts) and pops (with fast purchases and calls). It would not be surprising to see a near-term overbought market pause or pullback on this first test of the key resistance level at 2,600. If the market powers through 2,600, then the stage is set for a short-term melt up.

Your thoughts and comments are always welcome — please send them to drbarton “at” vantharp.com

Great trading and God bless you,

D. R.

2 Thoughts on “All You Need to Know About the Markets in One Chart, by D. R. Barton, Jr.”

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