With all the chaos in the markets yesterday, I know a lot of traders are scared. But I still believe we’re near the end of this “correction.” To show you what I mean, I’m going to break down what a correction looks like on my charts…
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Nothing gets a whole bunch of people freaking out faster than a few down days in the market.
And let me be very clear: I sympathize. It’s been awful out there. And if you’re scared right now, it is completely understandable.
But fear is not the foundation of any good trading strategy.
Panicked, emotional trading is a quick way to getting yourself destroyed – I know because I’ve been there before.
So when the dust has settled on a bad day, you need to take a step back, take a deep breath, and try to really understand what’s happening.
I wanted to help you do that today by breaking down what I think is a “correction” in the market.
What is a correction exactly?
Technically speaking, according to the Investopedia definition, “In investing, a correction is usually defined as a decline of 10% or more in the price of a security from its most recent peak.” But the name kind of says everything — a correction is when the market reacts to an asset that it believes is overpriced, and adjusts down accordingly.
Now, remember, when I say “the market,” I don’t mean that there’s one sentient being known as “the market. I don’t even mean that the market makers on Wall Street have that much power.
I’m talking about the collective, monolithic power of thousands of traders and investors reacting to news and dragging the market in a certain way.
And in the past few weeks, we have definitely seen a correction where the huge majority of investors and traders have pulled the market lower based on their reaction to things like Russia, inflation, the interest rate hikes, and so much more.
Now, that’s the explanation of why this is happening at a broad level.
But if you know anything about how I trade, you know that the “story,” what we call the “fundamentals,” doesn’t actually mean too much to me.
I look at what the chart tells me – the “technicals.”
So let me show you what a correction looks like.
All of this is based on Elliott Wave Theory, an advanced technical form of analysis specifically designed to look at recurring patterns in long-range price movement.
Now, Elliott Wave is complicated. It took me years to learn. But I can give you a crash course in this one concept.
Generally, according to Elliott Wave Theory, corrections happen in threes: and typically, those threes are counted A, B, and C (as I’ve circled on the chart above).
So, what we’re seeing in the chart above looks like a correction.
With a classic correction, (A), the first move, is counter-trend. And the move between 0 (the starting point) and (A) should equal the move between (B) and (C). They’re “in equality,” meaning they’re the same size.
That’s why that red line at 3960 or so is so important. If price reaches that level, the moves are exactly equal.
Now if you look at this on other major indexes (i.e. Russell, Nasdaq, etc.), you see very similar patterns.
Now, what does all that mean?
That suggests that, if this is a correction, we should expect the correction to be near its end, and that would suggest that we’re ready for the market to move higher.
I know that’s hard to believe after the past few days, but remember back in 2020 after the market crashed, how quickly the markets soared higher.
The market is fickle and can change directions very quickly.
Right now, we have to be patient and see if the expected reversal materializes.
Jeffry Turnmire and InvestPub do not provide investment advice. Trading involves a substantial risk of loss and is not suitable for all investors. Many traders fail and you should not trade with money you cannot afford to lose. If you need personal financial advice, consult a financial advisor.
Daily Profit Publishing and Jeffry Turnmire do not provide investment advice. Trading involves a substantial risk of loss and is not suitable for all investors. Many traders fail and you should not trade with money you cannot afford to lose. If you need personal financial advice, consult a financial advisor.
We are not licensed to provide you personalized investment advice. Nothing in these communications should be construed as personal investment or financial advice.
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