I’m often asked to analyze the markets in different conditions using different indicators to understand how they may tip the scales bullish or bearish. We have seen evidence stack up to tilt us bullish or bearish many times this year. That evidence has a huge influence on how we react as traders, which is why it’s important to always consider price action. Price action never lies.
Here’s what typically happens: When it’s obvious that we’re in overbought conditions, sentiment is too bullish, VIX is too low, put/call ratio is too low, etc. a herd mentality develops. Everyone moves to the other side of the boat.
Contrarian thinking is often a good thing, but if you take your eye off the main ball then you may be moving in the wrong direction (or moving prematurely). Consider price action first and foremost – this is the most important indicator of them all. If you lose sight of price action and only consider secondary indicators, you will not have the best read on market action.
Consider price action – it never lies
Recently, there was evidence that the market was getting tired and was ready for a good slide into bearish territory. The MACD had crossed bearish, new highs/lows weakened and volatility was starting to trend higher. But if you looked at price action, you would have seen that it wasn’t all that bearish. When the markets turned upward and off support levels, the traders who places bearish bets got burned.
Even on Thursday, December 14, the decline had numerous analysts and talking heads saying the markets were going to suffer a Grinch Christmas. They said the decline into the end of the year was starting (for whatever reason). The market action – and especially the price action – said differently. It will always serve us best.
Price action is not only the MOST important indicator of market movement in the present, it also provides us with great clues as to where we might see price go into the future. There are no guarantees of course, but the historical perspective certainly put the odds in our favor.
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