State of the Market|Reading the Psychology of the market

Are you feeling bullish or bearish? Because that’s what lead to interpretation of charts. Let me give you one illustration. What’s your view on S&P 500?

S&P 500- What is your view on the chart below?

Visually, the chart does not look great. It is trading midway between 1220 and 1020. Bulls will like to see as Glass Half full whereas Bears Glass Half Empty

Bearish View

Here’s how Bears will look at the chart of S&P 500. They will plot 200 dma on the chart; and will say see market is struggling.

Bearish View - S&P 500 is trading below long term moving average of 200 dma. This is the third time in last few months that this level has acted as stiff resistance and hence one should be careful on the market.

This explanation is factually true and simple but some bears would add more justification with complex logic and oscillators which actually means nothing.

Bullish View

Here’s how bulls will look at the same chart of S&P 500 - Formation of Inverted Head and Shoulder Pattern

Bullish View - Inverted Head and Shoulder is a very powerful bullish strategy. S&P 500 has formed this pattern over last few weeks with 200 dma as the neckline. Any breakout above 200 dma will lead to explosive upside move.

Which View is right?

Nobody knows. Both views have a point. The idea is not to form a view but formulate action plan on what one should do if one view turns out to be right.

Don’t think about what the market’s going to do; you have absolutely no control over that. Think about what you’re going to do if it behaves in certain way.

The idea is do not form a biased view

Let me know how you found this edition of trading notes.

Disclaimer - The state of the market notes is Deepak’s perspective on the market. The column is purely for educational purpose. Nothing contained herein is a solicitation to trade or a recommendation of a specific trade. By reading this publication you agree to make no trade relying in whole or in part on the comments of the writers

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