Updated: May 6, 2021
Studies shown a potential triple top for US markets
Above a monthly chart for Dow Jones. The month of July closed uneventful, but we could see a "shooting star" formed, this indicates weakness. Analysing into the bigger picture, we could see a potential triple top formed as well. Could we be heading for a correction soon?
Following is the micro view of this monthly chart, we could see how nicely the "shooting star" has formed at the closed of July.
The behavioural science behind price movement or chart
Behavioural science provide an explanations for why people make irrational financial decisions. It also refers to as studying into the market psychology and in the macro picture is called behavioural economics. In short, we believe there is likely to have a reason for every price movement, especially in those significant ones.
Was there any significant movement?
Yes, last year between the first day of October to the tail end of December, Dow collapsed a total of 4,997 points from it's high, also representing -18.7%. This was the most significant correction we ever seen in this whole entire uptrend since Lehman crisis in 2008.
What was the cause then? The fear of more interest rate hike. 2018 was the most aggressive year since the beginning the hike starting December 2015, we saw a total of 4 hikes in March, June, September and December. Market stop plummeting when President Trump made a strong stance on pressuring the Fed not to hike rate. However, I viewed it as a "cracked" of this super trend since 2008 and I would like to think it possibly as a prequel, preparing for the next move to come and it should greater than the current.
What about this potential triple top?
It still revolves around interest rate. 31st July was the announcement of Fed's decision. As widely expected, the Fed eased 25 basis point, however instead of a firmer market the US equities lost about 1% across the board. This is because Jerome Powell said :
"Let me be clear. I said it's not the beginning of a long series of rate cuts. I didn't say it's just one or anything like that,"
Means this cut, it is not going to be a "lengthy cutting cycle" or to be more technical, this ease, it is a retracement than a reversal of already up trending U.S. interest started since December 15. To monitor if on any continuity of U.S. interest rate hike, I will track on a few things:
1) The U.S. inflation
2) The strength of the U.S. dollar, if it is weakening
3) The inter-market market charts or price behaviour analysis to confirm
How to tell if our assessment is wrong?
Simple, when the market re-test and broke above July's high. This means that the market is resuming this super uptrend again.
We don't have to be right all the time, but we can sharper on our awareness, on what is happening around us. Managing risks is always a key in investing successfully. Remember, investing, it is not just focusing on the upside or capital gain, we also have to manage on any potential downside risks.
Think about it, between the two - upside and downtrend, which potential magnitude is greater?