The widely accepted concept of respecting price in the financial markets has been either forgotten completely or strictly adhered to; the answer depends on whom you ask.
Since I began Stock Traders Daily in January 2000, I have been developing strategies that respect price changes. Price has not fluctuated much all year in the U.S. stock market. In other words, volatility, as measured by VIX, has been extremely low. This lack of volatility has made respecting price a seemingly futile exercise.
However, that is not true for pure technicians.
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The added value of respecting price action is that we can seamlessly adjust and go with the flow of markets when directions change. Going with the flow is important, but that also means going with the flow of a market that goes up without much volatility, as the Dow Jones Industrial Average DJIA, -0.11% has recently. For those who respect price action, that has told you to be long and strong.
Eventually the Dow will have volatility again, and respecting price will seem more important there too, but we can see it in other markets today — in bitcoin BTCUSD, +2.64% .
For traders who were respecting price action in bitcoin, we can see that support levels broke on Dec. 19; breaks of up-channel support lines are material red flags. In other words, the breaks of support were sell signals for those long bitcoin, and short signals for active traders.
Regardless of news, the simple exercise of respecting price could have kept investors on the right side.
This exercise will be important to investors in the stock market again next year, but the trend has been one-sided all year, so the exercise this year was to maintain a long bias. This will continue to be true until the long-term support levels in the financial markets break.
Breaks of long-term support are what happened in bitcoin on Dec. 19. It has fallen by as much as 35% since then.
My word of warning is that investors who have forgotten why we focus on price to begin to remember. We respect price action because it can be a leading indicator of moves like this. It will matter to the markets in 2018 if volatility increases, as we expect.
Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily. Kee managed the fourth-best-performing strategy in the world in 2016, according to HedgeCo.