The study of price action is embraced by investors looking to predict future direction.
Price reflects all of the information that participants know. That balance of buy and sell opinions finds equilibrium in the price discovery process.
Evaluating price charts is often viewed as an objective method to predict future movements. Technical analysis can even be self fulfilling when enough followers use the patterns and signals to make decisions.
A chart formation that has commonly appeared over the last five years plus is the “V” recovery. The bull trend has been tested, but bounced back each and every time so far. Simply put, the measured move target on a “V” pattern is the distance on the drop on top of the pattern.
A “V” pattern starts with a sharp drop nearly straight down.
The price slide can be any time frame from minutes to days and beyond with the key being downward movement and limited snap back. The market sentiment is often extremely negative on the downswing with little optimism for a rebound.
Typically these “crash” moves exhaust themselves with capitulation that extends the dramatic drop even more. Non-believers in the selling become converts and shorts get more aggressive.
A price bottom is formed when the sentiment gets overwhelmingly one sided and prices rise against all reasonable expectations. The fear emotion leaves many paralyzed to act and afraid of more selling.
This sets up the conditions for a “V” recovery as disciplined investors find value at these depressed levels. The general public cannot think of any reason that markets can move back up.
Once the buying begins it feeds on itself. Shorts get stuck waiting for another downturn that never comes.
The next phase sees sellers frustrated that profits are diminishing and winners become losses for those who got in late. Stubborn shorts doubt the reality of rising prices because they believe they are unjustified.
At some point, often at a loss, a buyback closes out the positioning but a bullish mindset rarely develops.
The lesson to be learned since 2009 is that sell offs have been short lived and downside profits quickly evaporate unless taken right away.