Understanding market patterns: an example of how moving averages can help identify changes in market momentum.
Hello there!
This is the first in a series of articles in which we will introduce you to a different and exciting way of approaching the markets. Let me rephrase that. It is different, but not entirely new. In fact, its foundations were laid back in the 1940s. And it is exciting, although once you understand it, you may find it rather boring. Our approach to the markets is based on patterns. As we analyze the markets, we will break these patterns down and explain how they work. If that sounds interesting, keep reading!
First, we want to make something very clear:
we are analysts, not prophets. We deal with probabilities, not certainties. If you are looking for guaranteed predictions, you are in the wrong place. But if you are interested in potential scenarios, clearly defined risk parameters, and key support and resistance areas, you are exactly where you need to be.
Our goal is to identify key levels in advance so that we can determine whether the market is following our primary scenario or moving towards an alternative one. We will define potential take-profit areas beforehand, establish where our analysis is invalidated, and assess the associated risk.
We will also discuss hard stops versus mental stop-losses and explain the reasoning behind each approach. One important disclaimer:
Our analysis is provided for educational purposes only.
It does not constitute financial or investment advice, nor should it be interpreted as a trading recommendation.
Our ultimate goal is to help you develop the skills to conduct your own analysis, identify your own risk and take-profit
levels, and make informed decisions should you choose to trade the markets.Let's take a look at the market.
The SPX500 has climbed considerably higher than many would have anticipated just a few years ago. The current pattern is significantly extended.
SPX500 — Illustration of an extended upward market trend.
Does this mean the index has already reached its peak? - No.
Does it mean that the next correction is already underway? - Again, no.
- So, how can we approach the current market structure?
Let's take a closer look.
Based purely on price levels, we can argue that the market is overextended. However, the current price structure does not yet suggest that the upward move is over.
Illustrative representation of the support levels discussed in the analysis.
At this stage, the price structure points towards the possibility of another minor lower low, potentially taking the index towards the 7,450 area.
A break below this level would open the door to the 7,240 area, which represents the last major support zone for maintaining a bullish scenario.
But let's take it one step at a time.
If you are considering trading this setup, we could see another lower low early this week (starting November 2). This would represent the most aggressive buying opportunity.
Key Market Levels and Potential Price Targets
A more patient approach would be to wait and see whether the market produces another lower low
After the initial move into this area. This could take the index towards the 7,600–7,650 area.
If the market fails to break through this resistance zone, another move lower would become likely, potentially bringing prices back towards the 7,450–7,480 area.
This would represent the next aggressive buying opportunity.
For a more conservative approach, we would wait for a confirmed breakout above the resistance zone.
The index could potentially climb as high as 7,800 before facing another correction, which could take it back towards the 7,700 area.
Are these levels set in stone?
Of course not! Markets evolve, and so must our analysis.
These levels are reference points, not certainties. As new price action develops, we will refine our scenarios and adjust our expectations accordingly.
We can break this analysis down into smaller timeframes and examine each potential move in greater detail. If this is the kind of market analysis you would like to see, let us know!
We would love to hear your feedback and find out whether this approach resonates with you. Stay tuned, and let's see where the market takes us!