This year has been a very exciting one as far as price action is concerned, with no shortage of volatility and strong trending markets. However, even trending markets can develop in a rather choppy fashion, in a ‘two steps forward, one step back’ type of rhythm - meaning there is opportunity to trade in the direction of the trend but, there could also be opportunity in between trends, focusing on when prices pull back.
It can seem rather counter-intuitive to want to trade in the opposite direction to the longer-term trend. But, the S&P 500 illustrated how markets can trend over different time frames and for extended periods of time. Filtering for trades only in the direction of the long-term trend can then result in extended periods on the sidelines as price action moves further and further in the opposite direction.
Instead of following the bias religiously, traders should be observant and nimble enough to assess when the market is primed for a correction or exhibits properties of mean reversion that can be identified through price action and momentum. Major risk events or fundamental changes in things like inflation or central bank drive are just a few examples of catalysts that have the ability to sustain a countertrend move beyond the short-term.
To be clear, not all trending markets offer up such an opportunity for two-way price action and the general wisdom of trading in the direction of the trend still holds true. However, a market like the S&P 500, approaching a significant level of support (resistance) in a downtrend (uptrend), showing a tendency for deep countertrend moves, ought to be analyzed on merit.
