After a torrid week in US markets I thought it would be a good idea to start the week with an in-depth analysis of the S&P 500 for you. To do that we need to delve a little further into my theory of price action.
In last week’s video update I delved into my theory on buy and sell pivots (not pivot points — don’t be confused by the similarity in terms). I showed you how important it can be to understand what the direction of the most recent buy or sell pivot was.
In this week’s update we will go a step further and calculate where we think the probabilities are highest that markets will change direction.
Whether the market is trending or ranging there are levels within waves that I have found to generate far more reversals in price than anywhere else. I reveal what those levels are in today’s video update and take you through a detailed analysis of the S&P 500 since January this year, so you can see how consistently these levels predict changes in short-term trends.
Hopefully once you have invested the time to understand what I have been discussing over the past couple of weeks you will see that we are edging our way towards a powerful model of price action that can provide us with great risk/reward entry points into trends and also solid targets for taking profits.
If we understand how changes of direction occur and where those changes usually occur we can start enacting a trading plan that has little to do with our own views and more to do with the actual dynamics taking place within markets.
Technical analysis isn’t about predicting the future
No one knows the future. Technical analysis isn’t about predicting the future even though some try to sell you the idea that it is. It’s about finding areas within time and price where we can know very quickly if we are wrong. If we can confidently place a stop-loss at a price which we know will prove us wrong, very quickly we can leverage our position far more than if we are just making guesses and hoping for the best.
The more rules we have to define exactly what we are looking at when we view a chart, the less likelihood there is that we will wake up one day and read a news article and feel certain it is a buy, sell or whatever — and end up losing our shirt.
Instead we can become methodical and disciplined rather than jumping at shadows.
Unfortunately creating a valid model of price action is easier said than done. It’s taken me close to 25 years to arrive at a model that I think is a good balance between simplicity and complexity. Just as in chaos theory where a few simple rules iterated again and again can lead to mind boggling complexity, understanding a few key ideas about how waves form within trends or ranges and how markets change direction can make sense of what at first glance looks like random chaos.
So I hope you take the time to view today’s update. It is an important foundation to the updates that I will give in future.
Editor, Alpha Wave Trader