foxex: Battle Ground

Read in Browser

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Tuesday, June 16, 2020

1. Buyers and sellers battle for stocks in volatile trading

2. Market psychology in one intraday chart

3. Where is the money flowing towards?

Market Moves

The benchmark indexes closed higher on the day, despite selling lower than the price at the opening bell. The conflict apparent between buyers and sellers today sets up the rest of the week as a battle ground between support and resistance. The S&P 500 index (SPX) closed nearly two percent above Monday's close, cutting into the territory created by last week's exhaustion gap and island reversal signals. If buyers continue to push to higher closes those signals will fail, and that kind of failure is a strongly bullish signal.

The chart below compares State Street's S&P 500 index ETF (SPY) with three other sector index ETFs including Financial (XLF), Discretionary (XLY), and Energy (XLE). All four charts show a pattern similar to the one labeled in the upper left panel, with evidence of both support and resistance. The past two weeks investors have shown classic signs of something known as overhead resistance.

While there are many patterns that seem to articulate how sellers are resistant to holding on to a security beyond a certain price level, this specific form of resistance betrays a particular psychological reaction among investors. This behavior is often considered a manifestation of behavioral biases such as anchoring. The evidence for these biases can be seen in the chart as the price drops on Thursday and then rebounds today. This demonstrates that many investors perhaps wanted to close out positions as the price got back to something slightly higher than last Thursday's opening price.

This example shows that investors were anchored to the previous close as being important. Perhaps individual investors felt that they wanted to get out of the market earlier but weren't able to do so. Perhaps institutional investors had too many shares to sell in one day. Either way once the price returned to previous levels many of the market participants today quickly took advantage of the opportunity.

For chart watchers, this provides an important measuring point. The more price tends to drift lower (or higher) from these two levels which show evidence of support and resistance specifically, the more the price will forecast its future direction in the weeks to come.

Market Psychology in One Intraday Chart
The chart below zooms in to a 5-minute view of the price action on Apple (AAPL) today. The chart notes several important observations. Astute chart readers recognize four bullish signals within these moves: (1) the way the stock rebounds from the Fed Chairman's initial remarks to the U.S. Congressional committee, (2) how the point at which the price rebounds corresponds with yesterday's high, (3) how the price gravitates throughout the day around the $350 price target published by a Deutsche Bank analyst last week, and (4) the way the price closes more than two dollars higher than the price target at the end of the day.

These investors appear to be looking for excuses to buy the stock. They also appear to be willing to shrug off bad news quickly and surpass expected market valuations. These behaviors are notably absent in bearish markets.

3 Ways Traders Are Gaining Exposure to Rapid Changes in Technology

Cracker Barrel Misses on Earnings, but Stock Rebounds

SPONSORED BY DIREXION
How Long Will Bears Stay in Charge?
While the current market may be a factor in the small- and mid-cap bear market, it's far from the only one. Direxion's experts explain why it's happening and what lies ahead.

Learn More >

Where is the Money Flowing?

If investors are going to continue to seek out opportunities to buy stocks, it will be useful for chart watchers to anticipate where such purchases might likely occur. Sector comparison makes for a useful tool to help anticipate market moves. The 15-minute chart below compares the major market sector ETFs (issued by State Street), over the past three days. The strongest two ETFs are those for Energy (XLE) and Basic Materials (XLB). The weakest two are Consumer Staples (XLP) and Utilities (XLU).

When investors are nervous and seeking safety, money typically flows to the latter two ETFs. The fact that these are lagging over the past three trading sessions is a clear indicator that investors are seeking opportunity over safety. That is a bullish indication.

The Bottom Line

Investors anxious to buy on the dips battled sellers creating overhead resistance today. Despite this dynamic, many stocks, notably Apple, could be observed with price patterns that indicated how willing investors are to remain invested despite uncertainty. The sector distribution seems to imply that investors are favoring opportunistic sectors over safer ones right now.