Weekly Chart Review

Using Market Structure to Forecast Price Changes

Regular readers know that I send out a “Monthly Chart Deck” each month.

This month, I’m going to do something a little different. We will look at the basics of “market structure” and how to use market structure to help forecast price changes.

We will then apply these lessons to 25+ charts to see what they can tell us about various markets and how we should expect prices to move in the coming days, weeks, and months.

I will say upfront that this is not meant to be an exhaustive study on market structure; rather, it is meant to be “just enough to be dangerous.”

Let’s start with the basics.

Markets never move in a straight line up or down.

Instead, in an uptrend, we typically see prices move higher, then pull back for a while before resuming their move higher. The opposite is true in a downtrend.

If a market is not trending in one direction or another, it tends to oscillate back and forth. This type of market is often referred to as a “range-bound” market or a market in “congestion”.

The market can only be in one of two states: trending (up or down) or range-bound (oscillating back and forth).

---

In the image below, I have created a diagram that depicts a very basic “bullish structure” and a very basic “bearish structure”.

Note: the solid black line represents the price of a stock, ETF, futures contract, etc.

A bullish structure is characterized by a series of “higher highs” and “higher lows”; whereas, a bearish structure is characterized by a series of “lower highs” and “lower lows”.

---

Eventually, a “bullish structure” will shift to a “bearish structure” (or vice versa) and that is what I have depicted in the image below.

Note the key difference in the image above. At some point, the market stops making “higher lows” and eventually puts in a “lower lower”. This is called a “Change of Character (ChoCh)” which signifies a change in trend.

At this point, our bias should be towards seeing the market move lower as the uptrend has been exhausted.

---

The two examples above are very basic.

Instead, what typically happens in the market is what I have depicted below.

It is not uncommon to have a series of highs and lows (see the yellow dots), within an uptrend. This could also be defined as a period of “congestion”.

Despite this period of congestion, the market depicted above never changed to a downtrend because it kept making “higher lows” (red dots).

---

Armed with this knowledge, how do we use this to our advantage when looking at real stocks, ETFs, futures contracts, etc.?

Typically, when we see a pullback within an established uptrend, the market will pull back to somewhere between the 61.8% and 78.6% Fibonacci retracement levels.

Here is a real-world example from one of our charts detailed below.

This is a chart of Silver. Note how there was a “Break of Structure (BoS)” within an uptrend, it then pulled back to an area between the 61.8% and 78.6% Fibonacci levels and now appears to be resuming its move higher.

Is it a guarantee that the market in question will pull back to the 61.8% or 78.6% Fibonacci levels, absolutely not, but it’s a good proxy to use as a guide.

As highlighted with the blue arrow above, once the pullback has occurred, the market usually continues upon its previously established uptrend which allows us to frame up a potential target.

---

Similar to the chart above, in the 25+ charts below, I have overlaid a blue arrow to depict one potential path each market could take given its current market structure.

These projected paths assume the current up/downtrend remains in place. In reality, some of the uptrends will fail and will turn into downtrends, and some of the downtrends will fail and turn into uptrends.

We can’t predict the future, we’re simply trying to put the probabilities on our side. With that said, if a market is in an uptrend, it is probably fair to assume it will stay in an uptrend until it proves otherwise. For a change in trend to take place, we need to have a Change of Character (ChoCh).

Given the market structure parameters outlined above, once that happens, we know how to shift our targets and expectations.

Note: in the charts below, the goal is to define a potential price path but not the timing of said price path. These forecasts could take place over the course of days, weeks, months, or possibly not at all if the trend changes.

Now, let’s jump into the charts…

If you are not yet a paid subscriber and would like to see the charts/analysis below, please click the following link to explore membership options.