When I was a kid, one of my favorite book series was Encyclopedia Brown. I found the stories wildly entertaining.  Encyclopedia Brown always solved the case, no matter the difficulty or circumstance. I wanted to be just like him. I bought a magnifying glass and carried it everywhere along with a small notepad to write down my findings.

Fast forward 20 years and lo and behold: I’m a detective of sorts.

As traders, we’re all detectives seeking clues. Day by day, we compile evidence either supporting or undermining the bullish or bearish argument. Over the course of time, stock prices leave clues in their wake; revealing much about the underlying health of the market. Some clues are hidden in plain sight, while others are masked from all but the slyest of detectives.

The type of tools used and clues sought will differ from trader to trader. Some hold technical analysis in high esteem while others rely heavily on fundamentals and the bevy of metrics that accompany it. Some turn to volatility and standard deviations and still others settle on seasonality.

Unfortunately, the discovering of hidden clues never leads to an assured outcome. The revelation process goes as far as discovering an edge, but falls short of finding certainty. Certainty in the markets is ever elusive. Even the savviest sleuths fail to find it.

I came across an interesting chart comparison on Twitter the other day. It may contain clues as to the potential path our current market will follow. In case you’re wondering, the cool kids call these price pattern comparisons analogs. I’ve actually been using 2011 as a template of sorts for our current market, but I just hadn’t gotten around to overlaying the charts.

The yellow line is the S&P 500 in 2011, the blue line is the S&P 500 so far in 2015.

Consider the similarities:

1. Both experienced harrowing dives to kick-off the correction.
2. Both crashes sent the VIX soaring into the high 40s.
3. The initial oversold bounce formed bear retracements for both (ours ended on 8/28).
4. The second drop in both resulted in a higher pivot low (ours formed on 9/1).
5. The rally from the higher pivot low was ultimately rejected near resistance (ours did so today).
6. Volatility remained elevated for the 2011 episodes with gaps aplenty littering the landscape. Sound familiar?

If the analog continues to prove prescient, we could be in for some additional see-saw action. VIX spikes like those seen last week don’t typically go quietly into the night. More than a few aftershocks usually follow such a sharp move. While I wouldn’t be too quick to bank on price action in the coming weeks unfolding identically to 2011, it does at least provide a road map on how the S&P 500 has behaved following a similar crash in the past.

Selling rips and buying dips is always sound advice, but it’s particularly so during volatile trading ranges like we find ourselves in now. Don’t short into the hole, and for heaven’s sake, don’t go chasing longs after an up gap into resistance following a multi-percent rally.

Financial freedom is a journey

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