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S&P 500 and NASDAQ turn back negative as Dow slips

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Both the S&P 500 (SPX) and NASDAQ Composite (COMPX) have turned lower as the Dow Industrials have trouble with a 50-period MA on its 60-minute chart. Both the 5 and 30-year treasury yields are red and that indicates that there are still some buyers in bonds. Nothing "earth shattering" currently, but traders should still keep a sharp eye on bonds.

NASDAQ Composite Index Chart - last seven months.

Earlier today, I put up a 60-minute chart of the NASDAQ Composite and a reader asked, "how was trend (C ) on the 60-minute chart in the 01:30 update developed?" I like to draw trends starting with a weekly time interval so I get the "big picture" of what the index/stock looks like. I'll start with an upward trend, then a downward trend. The above chart (daily interval) would then be drawn using the following technique. Point (A) would be my "anchor point" for the downward trend. Using an extended ray, I could then begin "dragging" my trend line to a point (B) that looks to have significance to the developing trend. Once I've put my downward trend in place, that trend usually becomes my trend for at least two weeks of trading. Notice the rally to 3,000 back in mid-December. This was the "first test" of our downward trend. Notice the current level of trading on the daily interval chart. This is the second test of this downward trend. Traders will also note how our "confirmation" levels (thick pink) are basically anchored from these tests. We would note, eventually this downward trend will be broken, but until it is, the trend is downward. I'm also a believer that the longer a trend line becomes, the "stronger" or more "credibility" that trend has. The upward trends (thick green) were contrived from the 60-minute chart of the NASDAQ. Again, I like to leave these trends in place for days if not weeks as they can come into play sessions from now. Once I have a trend in place, that's the trend I want to play. If I keep "redrawing" trends every day, I end up lacking any type of consistency in my trading as the "levels just keep changing." Drawing trends are more of an art than science.

Why confirmation is so important

The above chart is also a great example of how a "confirmation" level can help a trader. See point (B) on the above chart? Why didn't I have our current downward trend moved a little to the left at the highs near 3,535? I did at one point! A also had a confirmation level drawn at that point to. Now, if you were to draw a trend from anchor point (A) to the rally near 3,535 on October 20, you might have bought that break of trend correct? Take a look at the chart below and see how the use of a confirmation level could have saved you from getting too bullish with a break of downward trend. The chart below is the same chart above, but the downward trend uses 3,535 as its second point.

NASDAQ Composite Index Chart - last seven months.

Our "first" downward trend on the NASDAQ Composite (COMPX) looked like the above. After a couple of weeks, it became fairly evident that this trend was a little too aggressive and the market seemed to be keying off a different level of resistance. We made the adjustment in the first chart of the update. Notice how none of the "confirmation" levels on the above chart have been violated to the upside? This type of activity continues to have us trading for profits and not expecting a whole lot from upward moves. Once we see this pattern broken, then we'll be willing to give some of our bullish trades a little more room to run. As long as a bearish trend or pattern prevails, traders should trade that trend and adjust their trading accordingly. Just as all good things come to and end, bad things come to an end too.

Jeff Bailey
Staff Analyst

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