The U.S. stock market has been under pressure but technically remains in an uptrend. However, selling has inflicted considerable damage in many stocks. Historically, that has been a problem going forward.
Market behaviour as a leading indicator
Bitauto Holdings (BITA) was one of the best performing stocks in 2014. The powerful advance is evident in the second chart below as the stock advanced by more than three times. But the price action in January is a severe breakdown with implications for what comes next.
The sharp decline occurred as the stock returned to the top of a 4.5 month range. The range or base defines the correction following the surge through 2014. The base could have been a set up to more upside but that is now in doubt. Heavy selling near what had appeared to be the completion of the base has historically been a major setback for a stock. The trading pattern of a stock is frequently the single most significant leading or predictive indicator of how the price trend will evolve. This particular trading pattern is bearish and many stocks have suffered significant damage that looks like BITA.
How to profit
Stocks and markets can be assessed from certain trading patterns, many with a very high reliability. The decline in energy markets is another example as outlined in Bottom fishing in the energy markets. Understanding investor behaviour as revealed in a security or market is a very effective tool in the decision to buy sell or hold.