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Technically Speaking: The 'Coiled Spring' Market

In this past weekend's missive, I discussed the market once again retesting support at the 200-dma.

"As stated, the market did defend its 200-dma and is very close to reversing its short-term 'sell signal.'"

"That's the good news.

The not so good news is that while the market did muster a rally on Friday, it still remains well-entrenched within the ongoing consolidation/correction process."

As you can see in the "reddish triangle," prices have been continually compressed into an ever smaller trading range. This "compression" is akin to coiling a spring. The more tightly the spring is wound, the more energy it has when it is released.

More importantly, these "compressions" cannot go on indefinitely and will resolve themselves. It is a binary outcome. Currently, we have now reached the point where we will likely see a "conclusion" within the next several days to a couple of weeks at the most. So, exactly what does that mean?

When these compressions normally occur in a rising market trend, they historically resolve themselves to the upside. However, as discussed in a moment, there are many factors at work currently which makes "betting" on a positive outcome substantially riskier.

The chart below shows the total expected range, based on the initial decline, of a breakout of the consolidation range. As I discussed this past weekend, I am using a "weekly chart" to smooth out daily volatility which means the next update on the chart will be in this coming weekend's newsletter.

If the market can break back above the current downtrend from the previous highs, a push to the top of the longer-term overhead bullish trend line is quite logical. That line has served as the peak of the current advance since the conclusion of the correction in early 2016.

A break downward, however, has

This article was written by

Lance Roberts profile picture
Unique, unbiased and contrarian real investment advice

After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; I have pretty much "been there and done that" at one point or another. I am currently a partner at RIA Advisors in Houston, Texas.

The majority of my time is spent analyzing, researching and writing commentary about investing, investor psychology and macro-views of the markets and the economy. My thoughts are not generally mainstream and are often contrarian in nature but I try an use a common sense approach, clear explanations and my “real world” experience in the process.

I am a managing partner of RIA Pro, a weekly subscriber based-newsletter that is distributed to individual and professional investors nationwide. The newsletter covers economic, political and market topics as they relate to your money and life.

I also write a daily blog which is read by thousands nationwide from individuals to professionals at www.realinvestmentadvice.com.

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