THREE CHARTS EVERY TRADER AND INVESTOR MUST SEE
Chris Vermeulen Technical Traders
March 28, 2020
CHART 1 – HUMAN PSYCHOLOGY IS WHAT DRIVES PRICE ACTION
This chart is my favorite as it explains trader and investor psychology at various market stages. It also includes a simplified market cycle in the upper right corner, letting you know where the maximum financial risk is for investors and the highest opportunity for a trade. CHART 2 – 2000 STOCK MARKET TOP & BEAR MARKET THAT FOLLOWED
The chart may look a little overwhelming, but look at each part and compare it to the market psychology chart above. What happened in 2000 is what I feel is happening this year with the stock market sell-off.
In 2000, all market participants learned of at the same time was that there were no earnings coming from their darling .com stocks. Knowing they were not going to make money for a long time, everyone started selling these terrible stocks, and the market collapsed 40% very quickly.
What is similar between 2000 and 2020? Simple really. COVID-19 virus has halted a huge portion of business activity, travel, purchases, sporting events, etc. Everyone knows earnings are going to be poor, and many companies are going to go bankrupt. It is blatantly clear to everyone this is bad and will be for at least 6-12 months in corporate earnings; therefore, everyone is in a rush to sell their stock shares and are in a panic to unload them before everyone does. CHART 3 – THE 2020 STOCK MARKET TOP LOOKS TO BE UNFOLDING
As you can see, this chart below of this year’s market crash is VERY similar to that of 2000 thus far, it’s based on a similar mindset, which is the fear of losing money, which causes everyone to sell their positions.
I am hopeful that we get a 25-30% rally from these lows before the market starts to fall and continue the new bear market, which I believe we are entering. Only the price will confirm the direction and major trend to follow, and since we follow price action and do not pick tops or bottoms, all we have to do is watch, learn, and trade when price favors new low-risk, high reward trade setups.
It does not matter which way the market crashes from here, we will either profit from the next leg down, or will miss/avoid it depending on if we get a tradable setup. Either cause is a win, just one makes money, while the worst-case scenario just preserves capital in a cash position, you can’t complain either way if you ask me.
