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After 31 years in the markets, there are certain patterns you start to recognize that go beyond typical support and resistance levels. One of those advanced concepts is what I call a liquidity pocket — and it’s been playing out exactly as expected in the Magnificent Seven (MAGS) stocks.
For those who have followed my analysis over the last several days, this move should not come as a surprise. MAGS reached the level I had identified, the number of stocks making one-month highs weakened and the broader market began confirming the setup.
What’s a Liquidity Pocket?
A liquidity pocket is an area where price is unlikely to move above a specific level. It is not simply a line on a chart where sellers may appear — it shows where market liquidity can support further price movement, and where that support begins to disappear.
You can have all the bullish sentiment in the world, but if there isn’t enough institutional liquidity above a certain level to absorb buying pressure, price cannot keep moving higher. MAGS reached that pocket and started declining exactly as expected.
The bond market added another important layer to this analysis. Bonds fell to a new low, putting additional pressure on technology stocks. That’s no big surprise because changing yields can reduce the appeal of long-duration growth assets.
When tech is already pressing into a liquidity ceiling, weakness in bonds can become the catalyst that exposes a lack of support above it.
This was not a prediction based on one isolated signal. It was a setup I discussed repeatedly while the evidence continued to build.
The Broader Market Confirmed the Warning
Weakness in the S&P 500 Equal-Weight ETF (RSP) showed that participation beneath the major indexes was deteriorating. At the same time, money was rotating away from technology and fewer stocks were reaching one-month highs.
Together, those signals indicated that the apparent strength in headline indexes was becoming increasingly narrow.
Volatility was also moving higher. Rising volatility can cause liquidity to thin out as market participants become more cautious, making it harder for prices to break through overhead levels.
If volatility continues climbing, traders should expect faster moves, wider price swings and a greater need for disciplined position sizing.
That’s why liquidity pockets should not be viewed in isolation. Their value increases when the bond market, breadth, sector rotation and volatility all point in the same direction.
In this case, they created a clear picture: Technology was losing support just as MAGS reached an area where the upside was likely to run out of steam.
If you’re serious about improving your technical analysis, start watching where liquidity exists — not just where you think support and resistance might be.
Combine that information with market breadth, bonds and volatility, and you can identify potential turning points before they become obvious to everyone else.
I hope that helps!
Roger Scott
Roger Scott Trading
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