Traders Track Stock Market Patterns For Reversals

No support, no resistance as the stock market opened with a gap down and continued to topple to the downside through midday.

Pundits, analysts, banks, media, and traders are saying the downturn could get worse.

But will it? And if it does, does it really matter to traders who are tracking stock market patterns for reversals?

Wall Street falls heavily across the board

Before the opening bell on Wall Street Friday morning, the three major indexes had fallen to lows not seen since July.

The Dow was down 17.23%, the Nasdaq 29.26, and the S&P 500 21.15% to start the day.

By midday all three were down further by more than 2%. All have pushed back toward bear market territory (down more than 20%). The Dow has fallen below the key psychological level of 30,000, down more than 700 points midday and is possibly headed for a new low at the closing.

All this with economic recession data still lurking in the background. The latest data shows second quarter U.S. real gross domestic product (GDP) growth is -1.5% which follows the 1.6% GDP decline in the first quarter. These back-to-back negative GDP numbers reveal a recession in play as 40-year high inflation continues its stronghold on the economy.

Stock market prices are helter-skelter across the board with oil plunging to an eight-month low ($78.83 midday) and the U.S. dollar spiking to its highest level in more than 20 years ($112.79 midday).

And gas prices at the pump are inching up, again.

Market and economic woes are not only hitting the U.S, European economies face historic inflation and harsh monetary policies (including interest rate hikes) designed to prevent, or at least lessen, the effects of an impending global recession.

There are more variables for traders to consider, and finding a path through this unpredictable environment is a must.

Follow stock market patterns for reversals

As stated various times in Simpler Insights, traders are staying in the mix with setups focused on the S&P 500.

Much of the problem recently for traders has been the uncertainty of market direction. The market just hasn’t settled into a sustained trend. Thus the need to shorten time frames on executed trades.

And traders don’t want to “short in the hole” – take short positions as the market continues to sink deeper to the downside toward new lows on the year, according to Raghee Horner, Managing Director of Futures Trading at Simpler Trading.

“If the momentum reverses or doesn’t continue, we’re stuck with a losing position,” Raghee said. “It’s a tough spot.”

Raghee sticks to a long-standing plan in this type of environment. She starts with market structure – exponential moving averages that follow price.

This is still a choppy market, despite recent gaps down, and she is looking for patterns that give a heads up to a reversal within the range.

“This is not a trend reversal,” Raghee said. “It’s a pattern reversal.”

The pattern is revealed in daily sessions by following technical analysis on stock charts. Raghee also closely watches the VScore indicator which shows behavior of price relative to the volume weighted average price (VWAP).

The VScore is showing a drop toward the mid-July low (as of Thursday at close).

“Volume tells me where the commitment and intention lies in the market,” Raghee said.

Traders can use these chart signals to follow a choppy market, volume support, and a potential pattern that signals a trigger to execute a trade.

Raghee uses this process in any choppy market.

“Keep an eye on market structure,” Raghee said. “Focus on choppy markets and take a look at volume.”