In the spirit of opening the box a bit: Some hopefully educational insights into technical analysis and technical pivots as they are so tremendously important for navigating through these crazy markets. At the end of the day technical analysis is not some magic potion but it’s a tool we use to identify risk vs reward and trade set-ups on the short side as well as the long side, especially also knowing when patterns are invalid and when price pivots indicate a potent shift in direction.

It is an exhaustive topic, hence for the purposes of this article I want to highlight just a few recent examples: And be clear: I’m not promoting technical analysis as a guaranteed solution to everything, patterns shift, news items can render a pattern invalid, momentum to the upside or downside can challenge any technical trader, hence technical analysis is a guide for identifying what’s relevant, what’s not and help traders and investors in their market journey.

Let’s start with a popular stock, $TSLA, which had a monster move over the past year.

I voiced some concerns over it at the beginning of the year with this tweet:

Hey 2000 tech bubble watch this:$TSLA: massive rising narrowing wedge.
Price $100 above its weekly Bollinger band, negative RSI divergence.
Price 176% above its weekly 50MA. pic.twitter.com/1Q3OmWzpF8

— Sven Henrich (@NorthmanTrader) January 10, 2021

The technical disconnects were awe-inspiring, the stock had moved so far so fast. In the chart I highlighted a monster rising wedge which $TSLA had just hit that day at $880. The wedge was narrowing and concerning especially in context of the vast technical disconnects.

A few days later on January 14 I discussed $TSLA in more detail in a Business Insider article (click image for source article):

Specifically what I said in the article along with the charts included was calling for a monthly 5 EMA reconnect:

$634 was the level at the time and the target to be hit within 6 weeks.

6 weeks came due yesterday. And guess what?

$TSLA dropped to $620 yesterday:

A $260 move down from the original tweet.

And then $TSLA saw this violent bounce off of that price zone. Why? Because it was hitting a key technical support pivot: The monthly 5 EMA. And then what happened? What’s the word? Bang:

An aggressive bounce off of that technical pivot. But note also the concept of confluence. Not only does the monthly 5 EMA reside in this area, but also the weekly middle Bollinger band:

So you had two combining technical pivot points that suggested risk reward was shifting dramatically. Key here is that this level was known 6 weeks in advance because the chart history already said so and highlighted that this areas was going to be key support.

Now $TSLA is enjoying its bounce, but note the larger wedge has broken which is a bearish sign in general, but this is a different story. The key points I wanted to highlight here is that technical disconnects matter, price pivots matter and pattern structures matter as well.

And some of these are tricky as they can become invalidated. Recent example: $SPX formed a classic head and shoulders pattern in the past couple of weeks. I’ve seen many head and shoulders pattern go up in smoke in recent months as markets just relentlessly drifted higher.

Yet this one played extremely cleanly, it had a specific target of 3815 and once that target was reached the risk reward equation had again shifted from the short side to the long side. The specific sequence you can see in these tweets:

Nice bounce from the target zone back to the neckline.
Nice example of technicals working and knowing key pivot points.#riskreward pic.twitter.com/92M2pthBeK

— Sven Henrich (@NorthmanTrader) February 23, 2021

$ES ran right back up to the neckline as resistance. Another key example showing how patterns, price targets and pivots are important to identify shifting risk/reward.

How to then determine whether price fails there at the neckline or rips higher? This part is part art, part science with patience being the operative word for key then is to see how the charts evolve.

And by this morning on $ES a well formed potential inverse head and shoulders was forming which suggested a strong possibility of an upside breakout as long as the pattern didn’t invalidate.

Seeing the pattern before the breakout was key. Hence the question:

Did you see it?$ES pic.twitter.com/nrAMXGyJtg

— Sven Henrich (@NorthmanTrader) February 24, 2021

And what a follow through breakout it has been and there were other factors at play of course as well, hence we can’t keep losing sight of the macro and this week’s macro was dominated by rising yields and of course Jay Powell’s congressional performance something I had highlighted here:

Yield Shield: A key dynamic to watchhttps://t.co/Kc8FO0pAzO

— Sven Henrich (@NorthmanTrader) February 22, 2021

And indeed getting the 10 year to reject near the key technical pivot zone was key for bulls to see happening fora reversal suggested being supportive of a relief rally:

So far mission accomplished as markets are rallying on a reversal of yields off of a key level.

So you see, confluence matters, the different moving parts matter, the pivot points matter and the patterns matter and they help put context to the action.

For without context one can only laugh and shrug at the charts as with the recent price action of the $DJIA:

¯\_(ツ)_/¯$DJIA pic.twitter.com/Sdfk9TgiSQ

— Sven Henrich (@NorthmanTrader) February 24, 2021

What is the context of this $DJIA chart? Here you go:

Notable here and supportive of the recent reversal rally was that $DJIA didn’t really correct but just consolidated and now has broken out to new highs. What happens here at this renewed trend line tag remains to be seen, but note the $ES inverse target is higher still.

Moving parts, shifting patterns and risk reward levels. Identifying key technical pivots. It’s all part of the journey that makes technical analysis not only challenging, but also fun and rewarding.

All content is provided as information only and should not be taken as investment or trading advice. Any investments, trades, and/or speculations made in light of the ideas, opinions, and/or forecasts, expressed or implied herein, are committed at your own risk, financial or otherwise. For further details please refer to the disclaimer.