It is important to understand that after the type of sell off that occurred recently, markets often don't just reverse back up in an instant. Many of the participants that were buying fearlessly months earlier are now not so fearless. New participants who are entering the market can also see how large and fast a correction can be and are cautious. This sentiment is often reflected in the news and hype outlets that these participants often react to.
What typically follows a period of highs or a dramatic correction is consolidation. The market needs to prove that it is stable which in this case would mean failure to make new lows, and secondly, there needs to be a string of catalysts that get the hype machine going again so that the herd reacts by buying.
In this market, the key signs of strength to watch for are:
A retest of the 778 higher low. This can unfold in the form of a failed low, meaning price touches the 739 lower boundary of the current and holds by printing a common reversal pattern like a .
A break of the 921 which is related to the old support/new resistance concept and also a .382 resistance of the recent swing. The break and close above this level will confirm the higher likelihood of a continuation structure.
An extending triangle formation over the next few days which demonstrates a lack of selling in my opinion especially if this occurs within the 872 to 739 (.618 area relevant to recent structure).
Can't this formation also be considered a lower high which is a sign of weakness? It can be, but typically weakness does not waste time. Often selling unfolds much faster than buying in financial markets in general. (It will take a week to go up 100 points and then give it back in 2 days). So as long as price is holding rather than pushing lows, it is less likely to be a lower high, especially since this consolidation is occurring within a major .
In summary, which direction the market chooses is up to the market. The best we can do is interpret the price action and measure where it is more likely to go, and adjust as new information becomes available. Charts and chart patterns do not move markets, they only serve as a reflection of order flow. Since history repeats itself and markets trend, it is possible to gain some insight into the immediate intentions of the herd and that is what TA helps us do. Good TA is not trading, it is a visual guide that can help us make trading decisions that are more in line with market intentions. Trading is about putting capital to work in an a way that will generate profit over some period of time. Your time horizon determines what information carries more weight when using TA. I have been in these markets because long term fundamentals have not changed. It is a just a matter of waiting for the technical aspect of the market to realign on the time horizon I am trading and that is the position trade horizon.
Questions and comments welcome.