How I Know When the Markets Will Switch Direction

Predicting the point at which an index switches directions is an inexact science - unless you've got math on your side.

And in this instance, thanks to our friend Leonardo de Pisa - creator of the Fibonacci sequence - we're potentially zeroing in on some pretty substantial information.

On the markets, traders use Fibonaccis - also called Fibos - to determine points of support and resistance on an index.

Look, it's no secret that most people don't love math.

I get that, it's not exactly sexy. But, that's one of the reasons you have me in your back pocket as your handy, technical-trading pal.

Take a look at this chart...

These are the Fibos of the Invesco QQQ Trust Series 1 (QQQ) - from the pandemic bottoms to the top that we saw in November 2021.

Math to some, art to others, when applied to trading, Fibos carry big implications by more or less setting the price at which buyers or sellers start to act.

Take note of $287.56 - that's your magic mark for your 50% retracement. It's the halfway point between those aforementioned highs and lows and is reflected on the above chart as the horizontal purple line.

These retracements are particularly important because a lot of traders are waiting for its signal to move.

So, we're eagerly waiting for QQQ to break above that 50% mark - let's round up and call it the $288 mark.

That is the big test - the final exam if you will. You know my rules: one time above that retracement point is an event, two times makes a break, and three is a trend. If we don't close above the 50% Fibonacci retracement level, you're going back to the bottom.

If it does close above 50% and continues the larger trend, we are in for one hell of a rally. There has never been a bear-market rally that closed above the 50% Fibonacci that subsequently went on to make new lows.

Now, as of Friday, we did close above the 50% retracement. So, if we see that three times, we should expect the market to continue its run higher. If we dip back down, then we are sliding deeper into the acceptance phase.

It's exciting. It's even a little nerve-wracking, especially considering the QQQ is currently trading extremely close to that 50% mark.

This is just another piece of evidence, on top of the 50-day moving average (50MA), the open-interest configuration, regression channels, and a host of other things, that this market is seriously congested in this tight trend.

That takes care of the math, but there's a psychological component to this congestion, too.

Almost all of the money is sitting on the sidelines. The only dollars moving are going from one index to another - e.g., energy to tech and back to energy.

What we're keeping our eyes out for most is the thing that's going to get new buyers to enter the fold.

If we get above our top-top regression channel of $292, that opens the door for a run that could go as high as $310 - Right in line with the rest of the market challenging its 200-day moving average - before the end of December

Maybe even further, if momentum starts carrying these stocks the same way they are in the S&P 500, which we talked about last week.

This movement would happen purely on hope - the hope that it is the end of the economic downturn, all because people have the thought that the market is rallying... In reality we have only seen a lateral move because we haven't gone above the levels from the beginning of the month.

But there's one more thing on the potential range of outcomes that you need to be aware of - and this falls more into the psychological category.

This market is currently walking on eggshells - moving very carefully.

Anything that starts to cause a little bit of a trend, and I mean specifically a bad reaction to bad news - maybe the Personal Consumption Expenditures (PCE) data later this week - the QQQ could drop down as far as the $275 where the MA50 is.

I've never seen this much congestion. But the 50% retracement mark is so crucial because it's going to set everything free and get everything moving again.

We're going to be watching that $290 mark extremely closely.

All we have to do is wait for the market to make a decision. It all comes down to the next move.

I can't tell you which direction the movement will come, but I can guarantee you we will be ready to make money on the movement.


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About the Author

Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.

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