There is no disputing the fact that markets are in a bullish trend with price action. However, since the election, the markets have corrected a few times, and that seems to make some people nervous. If you fall into that category, it’s time to start following price action.
As a technician, I look at many different indicators that can give me a good read on future direction. It’s not a guaranteed system, but what is? I like to stack evidence together to make a compelling case, so I look at MACD, price oscillators, stochastics, momentum, and volume indicators, among others.
However, these indicators are trumped by the most important of them all – price action.
Why price action is so important
Lately, we have noted some improved price action, yet some of the indicators had started to fall off the bullish side and into bearish territory. Even though evidence was mounting, it was far too premature to take a bearish stance. Sure enough, price action stayed steady, and last week’s rally lifted the other indicators to the bullish side of the ledger.
If you chose to short or play bearish, your gains were few and far between. A bull trend makes it very difficult to swim against the tide (the same can be said for a bearish move). A trend can last far longer than you could imagine, and it often turns when you least expect it. Trying to fight the trend can be a miserable and painful experience.
This is where price action comes in. Analyzing it will allow you to buy dips when the market corrects. It requires superior timing and execution, but using technical analysis will give you a leg up, especially when the signs point to an overbought condition.
Eventually, the markets will correct, and you will have the opportunity to buy stocks at lower prices. Until then, pay attention to that price action. It will steer you down the right path.
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