In this Chart of the Week, How to Recognize Schizophrenic Price Action
What does it mean, and should it be traded or not?
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The Master Trader top-down method of stock market analysis is a comprehensive approach that starts with a Techno-Fundamental perspective and narrows to individual stocks.
Master Trader uses a Top-Down method to educate students through courses and letter memberships
The Advisory Swing and Options Trader Letter overviews the broader markets, sectors, internal market gauges, and a bias for the next week. And continuing education in Master Trader Technical Strategies.
There will be new swing and options trades for the week and a video of open trades each week.
Below is part of last week's review and education.
Last week was relatively uneventful. At the beginning of the week, most markets moved closer to their respective support areas or slightly below before stabilizing.
On Thursday, traders came back refreshed and enthusiastic to buy again.
The broader markets gapped slightly higher and then continued up toward resistance, where it was evident that sellers would emerge -- and did.
When we "look to the left" to see where the price resistance is, we know the sellers will be there; however, we don’t know the reaction to that resistance.
If prices move sideways at that resistance, it communicates strong demand and the likelihood that prices can move higher and test the next resistance.
If prices retrace to the previous support area and buyers emerge in a reversal pattern, this communicates willing buyers on a dip.
Bar-by-Bar Analysis will determine the probability of follow-through or lack thereof for each occurrence mentioned.
S&P 500 as of 1-3-25 Daily and 15-Min. Charts
The charts above show the daily and five-minute time frames of the S&P 500. The red arrow shows Monday’s high, and the green arrow shows Thursday’s low.
Thursday's prices gapped up in the middle of Tuesday’s range, and after an initial stall, they moved sharply higher, as seen in the 15-minute timeframe, where a bullish Wide Range Bar (+WRB) formed.
As prices neared the resistance marked on the 15-minute chart with a red outline box around the Pivot Highs (PH), sellers were aggressive, and prices moved sharply lower, forming a bearish Wide Range Bar (-WRB).
Master Trader Tip: A +WRB followed by a -WRB is a schizophrenic type of price action that creates uncertainty. Wait for prices to regroup before trading.
Prices declined to the multiple Pivot Lows (PLs) in the green box on the 15-minute timeframe. Buyers would be there at those lows, but we don’t know the reaction.
The “mechanics” of buying and selling at support and resistance are that there will always be reactions to areas of congestion. That doesn’t mean we are going to trade those areas. We will wait for recognizable patterns to form that communicate the probability of moving in a direction.
A bullish reversal formed on the 15-minute time frames as prices moved up from the PL area, but it was much too erratic to consider a trade.
At that point, I was uncertain what would follow. A sideways consolidation could support a long bias as a larger pattern evolved and uncertainty diminished.
The schizophrenia (erratic price action) continued, and prices plummeted below the 15-minute support and moved down to support on the daily timeframe.
Buyers stepped in at the recent daily PL and stabilized prices, as seen by the formation of the Bottoming Tail (BT) bars.
On Friday, buyers stepped in again, and this time, demand continued. As prices reached the PLs earlier in the week, prices moved sideways, “absorbing supply” rather than declining. Prices closing near the day’s high indicate confidence.
The retest-reversal pattern and Friday's positive close support a short-term bullish bias. However, the daily pattern is erratic, so it’s best not to get too aggressive.
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