Three Paths Home

In today’s edition of The Open Bar, I walked through the three major outcomes that could unfold from here – which is most likely, and where the key VWAP levels are for various sectors and indexes.

Quick recap below, but if you want to catch the full replay, click here.

The big question we discussed is whether these consolidations will end up being continuation patterns or reversal patterns.

Here’s a look at the Financial Sector SPDR which is a great example of the potential topping formation we’re seeing all over the market right now:

Scenario 1: The Bullish Path – Breakout!

The bullish scenario plays out if we reclaim the VWAP anchored to the range highs, putting buyers back in clear control.

This would mark the kind of authoritative upside resolution we need to see in order to have conviction the path of least resistance is higher.

It’s back to “get money mode” if and when that happens…

Scenario 2: The Bearish Path – Completed Top

On the other hand, if the VWAPs from the lows don’t hold, the charts will tell a different story.

One or two big down days could test and break these levels fast.

If those lines are violated, it could spell serious trouble across the broader market, and under that scenario, we’d be looking for shorting opportunities.

Scenario 3: The Chop Zone - Trendless & Messy

This is the scenario we need to be most prepared for.

Action remains choppy, and both breakouts and breakdowns are at a heightened risk of failing.

If we don’t reclaim range resistance, it doesn’t necessarily mean we’re going to break range support. The pain trade is no clear direction, no resolution, just sideways for longer.

Imagine if we traded in this VWAP pinch range into year-end. It could happen.

In this kind of environment, patience is king, and being selective with your trades is key, because forcing positions often leads to getting chopped up.

If you missed this session, make sure you catch the replay here.

Steve