Stock market indexes can move in a disorderly and inconsistent manner. Understanding the movements can help traders and investors gain greater confidence in the broader outlook, which, in turn, helps determine the direction of the underlying price trend. A price showing a consistent or directional move indicates a continuation of the same trend in the future.
Consistent stock market returns occur when one trades in the general direction of the primary and underlying trend. The trend is your friend motto is one of the easiest and simplest ways to determine current and future trends.
Many market indexes recorded price lows last Thursday (5/12/22). At the same time, the market indexes traded to oversold levels, as evidenced by RSI readings in the low-30s. The 5/12/22 intraday lows are SPX (3,858.87), INDU (31,228.22), NYA (14,695.69), COMPQ (11,108.76), NDX (11,692.12), MID (2,326.17), SML (1,138.91), and IWC (104.94).
One week later, on 5/19/22, market indexes are currently trading above their respective 5/12/22 intraday lows, except for INDU, which recorded a lower low pattern. The 5/19/22 intraday lows are SPX (3,876.58), INDU (31,016.41), NYA (14,901.04), COMPQ (11,313.3), NDX (11,795.79), MID (2,373.26), SML (1,169.63), and IWC (109.81).
Remember there are two ways to confirm a technical market bottom. The fastest means to a solid market bottom is through a selling climax, exhausting the sellers. A reversal pattern such as a gap-up, island reversal, positive outside pattern, etc., accompanied by heavy volume, are technical indications of prospective bottoms.
The other way to put in a solid market bottom is through a series of higher-lows and higher-highs, creating a technical backing-and-filling process. A higher low signals the potential for an uptrend. A lower low signals the potential for a downtrend. A higher low accompanied by a higher high strengthens a sustainable uptrend. Conversely, a lower high coupled with a lower low warns of the start of a downtrend.
It is worthwhile to closely monitor the market actions for either reversal or technical basing efforts as SPX Index and market indexes are hovering just above their respective bear market levels (20% decline from the market top). Violations of the 5/12/22 lows and the subsequent breaking of the 20% threshold levels may send investors off the cliff.