When you assume, you make an “ass of u and me.” The famous proverb is a play on the word “assume” by combining the letters “ass,” “u,” and “me.” It is catchy and humorous on why you should not make assumptions.
Market pundits and talking heads are making all sorts of assumptions ranging from Russia invading Ukraine, Fed hard or soft landing, inflation abating or accelerating, economy headed toward recession, etc. When people assume a few words come to mind: presumptuous, premature, deluded, arrogant, rash, foolish, thoughtless, and other descriptive words.
Why do we assume?
As humans, we make many assumptions because it is the most efficient way to process an enormous amount of information in a complicated world. One-way humans save time and energy is by making assumptions. Humans also tend to rely on past and learned experiences to find patterns in how the world operates. When we encounter uncertainties and unusual circumstances, we draw upon these previous patterns or assumptions to help arrive at an answer to the new environment.
Are assumptions good?
Assumptions are part of our decision-making process. We all have biases toward or against something. The bigger problem is that many biases are unconscious, and we do not deliberately create them. Our subconscious is at work storing our opinions, collective experiences, likes, and dislikes behind the scenes without being aware of it. Although we all seek to arrive at the correct decision, a bad one is still better than no decision at all.
The same dilemma confronts many investors. Sometimes we make instantaneous and spontaneous assumptions with limited information, or insufficient data, resulting in hasty or rash decisions.
With geopolitical concerns, mixed economic numbers, and monetary uncertainties confronting investors, understandingly, many assumptions are made, some good and others poor, some with relevant and reliable information and others with irrelevant or incomplete data.
Technically speaking, major market indexes failed to clear their respective key resistance levels coinciding with 2/2, 2/9, and 2/10/22 highs. We also realized last Thursday, and Friday sharp market selloffs were the market’s response to the Russia and Ukraine news. The 1/24/22 lows are potentially significant market lows. However, we do not have the necessary evidence to confirm the low as the elusive but critical mid-term election year cycle bottom.
The collective market actions strongly suggest investors are digesting the markets. They remain unsure of the near-term direction of the stock market.
The big question remains what will come next, and how can we better prepare for the next market move?
Key markets have neither confirmed the next significant selloff nor cleared important resistances to signal the resumption of the bull rally. The market remains confined to a tight trading range. There are no obvious winners from the long or short perspective as the risk/ reward appears even or neutral.
The bears point to the lower-high pattern, weak market breadth readings, and the large head and shoulders top as warnings to support a market selloff. On the other hand, the bulls refer to the higher-low pattern from 1/24/22 and 2/14/22 lows and the bullish intermediate-to-longer term trends to suggest new highs over time.
The common wisdom is that if you search hard enough, you will find a way to make money. In hindsight, this is not entirely true. A directionless and volatile trading range market with no visible signs of a breakout or breakdown can lead to multiple losing trades. It is better to wait on the sidelines and wait for a better opportunity before entering.
Patience is a virtue. Investing and trading are psychological and emotional. Exhibiting patience and discipline are integral parts of successful trading and investing. It is not wise to be a perma-bull or a perma-bear today. Not if you want to make money. It is better to be agnostic without a bullish or bearish bias and let the market confirm the next directional trend.
Attached are updated support and resistance levels for major market indexes.