Context Is Everything by Gil Morales and Chris Kacher
This is how you use stock and index charts to determine market context.
You do not have to be a Chartered Market Technician to understand how market context can influence the price behavior of stocks. No stock is an island, and how a stock behaves is often a function of the market at large, which in turn is a function of underlying conditions — the context within which any particular market environment is developing.
In the simplest of terms, we know that in a bull market, most stocks go up, and in a bear market, most stocks go down, so this basic idea that market context can provide meaningful clues when studying stock charts is already something we are familiar with when we speak of bull and bear market environments.
IT'S THE CONTEXT
While the use of stock charts can be very complex, often the exercise of comparing the price behavior of a stock to a chart of the market as represented by, for example, a major market index such as the Nasdaq Composite Index or the Standard & Poor’s 500 can help you understand a stock’s potential strength. You are also able to better understand why certain price movements are evident in a stock’s overall price chart. When it comes to understanding the price/volume behavior of stocks, context is everything.
THE PATTERNS DON'T HAVE TO BE PERFECT
In autumn 1998 the stock market was experiencing a very sharp selloff in a very short period of time: a sort of “instant bear market” that lasted not quite three months but saw the Nasdaq fall 33% from peak to trough in that time. In Figure 1 we see the Nasdaq Composite Index daily chart from that period stacked on top of a daily chart of Charles Schwab, Inc. (Schw), one of the early leaders that emerged from the market bottom of October 1998. In this example, the Nasdaq came down in a series of three very sharp waves, the first ending in early August, the second in early September, and the third in early October.