The US stock market has been experiencing a correction since its peak at the beginning of September. Thus, it is always a great idea to take an advantage of lower prices and enter the pool of buyers. However, how can you know when is right time?
People are all about finding the bottoms to maximize their profits, but this is not something I would encourage you to do. You may find yourself catching a falling knife! Instead of that I strongly recommend to use the verified tactics, while sticking to your pre-set strategy.
I am introducing a technical model that shows a trend direction and trend reversal of the price in short to mid-term timescale. The model is using S&P500 index on an hourly chart with three simple technical indicators:
Since the stock market is in consolidation, the idea is to find an indication of the price direction reversal and then follow the trend. Once correction is over, the strategy can be applied also to simply follow the bullish trend.
Below story starts in July, when the price pierced through the upper line of the Keltner Channel, the RSI hit or broke level 70 (stayed below 80) and Slow Stochastic got overbought (above 80). Let’s call this event a Light Green Arrow. When this happened, the price kept going upwards for 2 months approving its price direction several times.
In the end of August the price pierced through the upper line of the Keltner Channel, the RSI hit or broke level 80 and Slow Stochastic got overbought (above 80). Let’s call this event a Dark Green Arrow. The combination of these three indicators means the price is too high and reversal/pullback is likely to happen. The price direction reversal happened few days later when the same indication was repeated and as a result the S&P500 plunged.
On the other hand, the same indication can be applied when the market is declining. September 4th, the price pierced through the lower line of the Keltner Channel, the RSI hit or broke level 30 (stayed above 20) and Slow Stochastic got oversold (below 20). Let’s call this event a Light Red Arrow. When this happened, the price kept going downwards.
September 21st, the price pierced through the lower line of the Keltner Channel, the RSI hit or broke level 20 and Slow Stochastic got oversold (below 20). Let’s call this event a Dark Red Arrow. When this happened, the price reversed upward.
Consequently, the price increase was justified by Light Green Arrows until the Dark Green Arrow appeared on October 12. Yesterday the RSI almost hit level 30 (29.93), which is perhaps again Light Red Arrow scenario.
When discovering the price direction using above principle, it is imprtant to always check a long term picture (daily chart) and its support and resistance levels. For instance, the S&P500 landed on 20 EMA, which is a current support for the index. If the price consolidates at this level, one may look for Light Green Arrow scenario in near future.
Summing up, from the short-term to mid-term perspective, it is handy to use Arrows Principles to navigate your trading decisions:
- Light Green Arrow: price tends to go up
- Dark Green Arrow: price tends to reverse
- Light Red Arrow: price tends to down
- Dark Red Arrow: price tends to reverse
Considering the current market and economy conditions, the equities are likely to stay in bull market. Thus, a successful trend follower would focus on Light Green Arrows – not dodging the other indications in same time.