How Low Can the Markets Go?

How Low Can the Markets Go?

The overnight drop in global stocks in the aftermath of the US presidential election are atrributed to uncertainty about the future. Will we get a Brexit-style selloff and if so, how far? Investors who don't want to guess can look to the charts and technical analysis for clues.

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As of 10 AM Chicago time, the US stock market has rebounded to erase most of the overnight losses, but the days ahead will almost certainly see more volatility and uncertainty. Some traders, let's be honest, enjoy speculating on what the markets might do based on the day-to-day events of the political and economic world. But other traders prefer to turn off the TV and look at the charts. Trendlines won't tell you what the markets will do. But they can suggest possible levels of support and resistance that the market may move toward and use as stopping points. And in a market that may drop significantly, it can help to know what areas the market has already identified as possible levels of interest. 

Before we proceed, it's worth noting that just because many pundits say the markets are going to slump in the days to come doesn't mean we couldn't see more upside. This bounce could turn into a rally to new highs, followed by an end-of-year Santa Claus rally. So this is not a prediction, just some advice on how to split rallies and selloffs into units you can trade. 

We'll look at the S&P 500 index, tracked on the Nadex exchange as the US 500 indicative index. We'll also look at Gold futures for those of you who may want to trade the "flight to safety." 

With a drop as big as the one overnight November 8-9, you have to go pretty far back to find lows to connect to form a trendline that might be support. 

Connecting the lows from October 2011 and February 2016 gives us a trendline that identifies the 1950-2000 level as near-term support. Will the market drop to that level? No one knows for sure and as an exchange, Nadex is not in the business of calling market moves or recommending strategies. 

But we can say with a reasonable probability that if it drops to that level, it is likely to find support there. That means that the sellers may find a larger number of buyers willing to buy at those prices. So every sell would be matched with a buy without having to drop the sell price any further—until all those sell orders get eaten up. 

Once that happens, if there were more buy orders still to be filled, if the auction is unfinished, the price would go back up and we'll see a bounce. That's what happened after the big overnight drop. 

What if the price only hesitates at 1950-2000 in the US500 (S&P 500) index and then drops further? What are the support levels further down? Again, these are not predictions, but technical analysts tend to agree on the major lines of support and resistance. The effect is sort of a self-fulfilling prophecy: because so many of us draw the same lines, we end up trading those same lines. In fact, the lines exist because we connected previous points where traders collectively agreed, "this is a good place to stop selling and start buying it back up." The long-term chart above shows levels at 1925 and below that, though it would take some time or some major drops to reach them, 1810 and 1760, which is the Fibonacci 61.8% retracement level. 

In the short-term view, there are several lines within the range established by the overnight drop, with extensions above and below. There are more you could draw yourself (and you should). And it's worth noting that just because most pundits say the markets are going to slump in the days to come doesn't mean we couldn't see more upside. 

It's generally best not to tell the market what it should do, but listen to what it actually is doing. After all, the market can't hear you (even when you yell at the screen). 

Finally, here's a chart of gold futures with a few lines. I'll leave it here without commentary. You see a lot being written about the "flight to safety" trade, meaning investors taking money out of stocks and putting it in so-called safe havens like US Treasury bonds and notes,  Japanese yen futures, and gold. 

The advantage for Nadex traders is that they don't have to pull money out of one asset class to trade another. You can trade stock indexes (US and global) as well as commodities like gold at the same time. You can do so on your desktop or mobile. And your risk is always limited to less than $100 per binary option contract. 

Use these charts to give you ideas and help you get in there and draw your own trendlines and identify support and resistance levels that makes sense for you. And if you like using indicators like moving averages and stochastics, apply those as well. Often when the market news is murky, the charts are very clear if you learn to use them. 

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