This One Chart Tells Me Where We're Going from Here

At the end of the day, an analyst's job is to take a complex thing, make some kind of good sense of it, and let his or her readers know what the data tells them.

When that complex "thing" is stocks, there are a few ways we can do that.

A fundamental analyst is going to look at things like cash flow for a company or the S&P 500, and... make some sense of it, and make an educated, informed guess as to what's going to happen - where those fundamentals will be in the future.

A technical analyst like me is going to look at history (in the form of charts) and determine - you guessed it - what's going to happen - whether history's going to repeat itself or not.

And so I'd like to share a chart with you all today. Not just "a" chart, but the chart that tells us not only where we've been, but more importantly, what to expect in the near term.

Here we go...

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The Market's Seven Steps of "Awareness"

Normally, I'd like to have a few charts to tell the story, but in this case, we really only need one chart - this chart. It's pretty dramatic.


It's a picture of a textbook grinding bull market - one with extraordinarily low volatility that has since exploded.

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For instance, on Aug. 9, 2018, the average true range (ATR) for stocks was a narrow, placid 12.67.

Contrast that with this past Wednesday morning (Jan. 2, 2019) when, immediately after the December 9% decline (the worst since the Great Depression), the S&P 500 experienced a 40-point drop followed by a 45-point recovery.

In fact, as you can see in the chart, there has been a sevenfold increase in volatility from the lazy days of August to the furious selling of December.

Volatility hasn't even started to recede, and I have no good reason to expect it will calm down anytime soon. For that to happen, we need some big, external "wet blanket" to soothe nervous sellers, like a trade agreement with China, or some stability in the White House, favorable earnings, or some resolution of Brexit.

Absent any of those change agents, where do we stand?

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Well, as I wrote in my forecast, we're standing squarely between the "Trump Growth" market narrative and the "Fed Fear" narrative, and the interplay and tension between those two market drivers is what's making stocks do what they're doing right now.

From a practical standpoint, I expect the market will continue to rattle - "careen" might be the better word - between the resistance established during the October, November, and December lows, to support levels at around 2,350, which were set up on Dec. 24 and 26.

This is no time for the overwhelmingly bullish bias that treated us so well throughout 2017 and the first half or so of 2018. But there's still a way to make money - and plenty of it.

Instead, profitable traders and investors will be nimble right now, playing both competing "narratives" as they jump between the passenger seat and the driver's side. That means taking profits on declines with short selling and puts, and profits on wild swings higher with quick long positions and calls.

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About the Author

D.R. Barton, Jr., Technical Trading Specialist for Money Map Press, is a world-renowned authority on technical trading with 25 years of experience. He spent the first part of his career as a chemical engineer with DuPont. During this time, he researched and developed the trading secrets that led to his first successful research service. Thanks to the wealth he was able to create for himself and his followers, D.R. retired early to pursue his passion for investing and showing fellow investors how to build toward financial freedom.

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