Have The Charts Been Helpful?

Fed Minutes Fail To Spook Bulls

While it is next to impossible to discern what made stocks rally after the Fed minutes were released, we can offer a few plausible explanations:

1. The market knows an interest rate hike is coming. Therefore, talk of rate hikes has a greatly diminished shock value at this point.
2. The minutes were more concerned with the “how to” of rate hikes rather than the “when”.

Observable Shifts In Risk Tolerance

Why do traders and investment managers use charts? They provide a method to monitor the market’s risk-reward profile. For example, the colored moving averages in the chart below help us filter out day to day noise, allowing us to focus on the underlying trend. When the slopes of the moving average are up, it indicates a bullish and lower-risk trend (see green arrow below). When risk starts to increase, the slopes start to flatten out (orange arrow). When the slopes of the moving averages begin to roll over, it tells us the market’s risk-reward profile is deteriorating (red arrow).

Higher Risk Period In 2010

In the 2010 chart below, notice how changes start to take place before the “Flash Crash”. The slopes of both the blue and red moving averages have rolled over, and price is below the blue, red, and green moving averages. Did the moving averages predict the Flash Crash? No, they simply said “risks are higher now than they were about a week ago”.

2014: Higher Risk Look Two Weeks Ago

The chart below is as of the close on August 7, 2014. It told us “the probability of bad things happening is higher today than it was about eight trading days ago.” From a general risk-management perspective, if the probability of bad things happening is higher, it might be prudent to reduce risk until conditions improve. The key term here is probability. Probabilities speak to flexibility; they acknowledge that the outcome could be bullish or bearish.