Editor's note: Our biases can get in the way of good investing decisions – especially during roller-coaster markets. But according to Ten Stock Trader editor Greg Diamond, focusing on the charts the right way can help us see clearly. In today's essay, adapted from the July 29 Weekly Market Outlook issue, Greg explains how to maintain a rational mindset throughout this up-and-down market... and what to expect in one sector.

'Good' and 'Bad' Charts Help Us Stay Rational

By Greg Diamond, editor, Ten Stock Trader

When asked to define a great trader, Bruce Kovner – featured in Jack Schwager's Market Wizards – has two things to say...

First, a great trader has an open mind about what's possible in the markets. And second, he's rational and disciplined under pressure.

This also describes how I approach technical trading...

In Ten Stock Trader, I often write about the importance of keeping an open mind and running through different scenarios.

The key is to remove any permanent bias you may have about the market. It doesn't matter what investors might want a market to do. We need to focus on what the market is actually doing... and likely to do.

But many folks get caught up in the fear... Every time we go through a round of volatility, they call for the end of the world.

I've seen this a lot recently on X. The bias of bearish investors is overwhelming... They constantly talk about a 1929-style market crash and another Great Depression. (My X handle is @DiamondTrader10, if you want to follow along.)

But these investors don't have an open mind, and they aren't rational, which Kovner urges us to be. Ultimately, permanent biases can cost you dearly.

So today, I'll outline how we can maintain a rational perspective... when looking at both "good" charts and "bad" charts in today's bull market.

The big question is... How can we stay calm through all the recent ups and downs?

The simple answer is, we can look at weekly price charts. They help us pinpoint the actual "damage" – what's really happening to a trend – after a round of volatility.

You see, weekly charts aren't as "intense" as daily charts, which provide minute-by-minute price action. Weekly charts offer a broader perspective, which helps us stay rational amid the volatility.

Let's start with a "good" chart. Here's a weekly price chart for the Technology Select Sector SPDR Fund (XLK), which tracks the overall technology sector...

Click the image for an expanded view.

There isn't a lot going on here in the price chart (the upper area), but that's the point. It's a simple weekly chart... The black dashed lines above show us that the uptrend is still intact.

Now look at the relative strength index ("RSI") at the bottom of the chart. The RSI shows us when prices have moved too far, or too fast, in either direction. In those cases, a reversal is likely.

I've outlined a positive RSI reversal with the blue line and red circles. This is a bullish setup, and the weekly time frame offers a positive message for investors...

Despite the volatility and calls for a market crash, this type of weekly chart shows us that things aren't as bad as some investors believe. This helps keep us rational... We can see the strong uptrend in the tech sector via XLK.

Shifting gears to the semiconductor sector...

It's no secret that the artificial-intelligence boom has fueled the rally in semiconductor stocks over the past couple of years. However, that doesn't mean all stocks in this industry will keep up.

Let's take a look at one underperforming stock in this sector, Micron Technology (MU)...

Click the image for an expanded view.

Unlike XLK, MU has broken its uptrend... The stock is down around 40% from its June 18 high.

You can also see that the RSI is near oversold levels. Investors have been rushing for the exits. (I'll discuss what this means in a second.)

It's highly unlikely that MU will make a new high with XLK (our "good chart" example). A lower high into the time-factor window signals more volatility ahead.

So, what does all this mean? Here's how I see things playing out...

The setup in XLK is likely to climb higher. The uptrend in this "good" chart is intact, and we recently saw a bullish setup on the RSI.

MU – the "bad" chart – doesn't have a long-term bullish setup. But it's likely to see significant bounces, given the oversold RSI level.

If I'm correct about the next inflection point in early September that I've been writing about (based on my cycle work), we're likely to see new highs in the "good" charts... and much lower highs in the "bad" charts.

And if that happens, we'll see volatility explode heading into the last few months of the year.

For now, I'm staying rational... and following the trend in the markets that haven't yet broken down.

Good trading,

Greg Diamond, CMT

Editor's note: Greg predicts the so-called "October Surprise" that precedes presidential elections will come early this year. If he's right, it could shock investors... upend the U.S. election... and open the biggest moneymaking opportunity of 2024. During the 2020 election year, you could have doubled your money 10 different times by following Greg's advice... So make sure you hear what he's saying now. Get the full details here.

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