A Trade and Trend Checklist, Part 2
For my trade and trend checklist, I'm using the Acronym "POVS" ('Pops' with a "V"), for the first letter of each word, to remind myself to check the following:
Pattern; i.e., price or chart pattern
The above are the major chart/indicator aspects I check before making a trade AND for my ongoing evaluation as to whether to stay in any option I'm holding.
I'll carry on a bit more on "Pattern" by seeing how patterns mentioned in my Trader's Corner of a week ago were influences.
I suggested two major chart aspects relating to Index patterns that could/would likely be influences on the rebound occurring in the S&P indices and in the Nasdaq.
In the daily chart of the S&P 500 (SPX) and S&P 100 (OEX), it was what would happen on a return to the previously broken up trendline. Support areas, once pierced (broken) tend to "become" resistance later on and vice versa (resistance "becomes" support). So, the question was would the trendlines in question act as deflections to the rally going on in the indices?
In the daily chart of the Dow 30 (INDU), the pattern was simply a rebound to a down (resistance) trendline - in the INDU weekly chart it was a return to the previously broken up trendline that was of interest.
THE RELEVANT CHARTS -
The S&P 500 Index (SPX) stopped short and then appeared to reverse after intersecting from what was the prior up trendline (had you kept it on the chart extended to the right). I marked key resistance in my 2/6 Sunday Index Trader column as being at 1205, which was the SPX high so far this week.
This 1205 figure came from just seeing where the intersection would be on this trendline extended out as seen below, not from any prior chart point like a prior top or anything -
The S&P 100 (OEX) chart below shows the same return to ITS previously broken up trendline. This, by way of showing how the same pattern tends to be repeated on similar indexes - but, not always. Sometimes the Dow chart shows a different pattern.
The Dow 30 (INDU) as shown on its daily chart below, did NOT come back to a previously broken up trendline, merely to its down trendline - very straightforward as INDU often is in its pattern.
On the WEEKLY Dow 30 (INDU) chart below, it was interesting to note that the weekly highs of late-August/early January were deflected by the previously broken up trendline.
What does this pattern yield of practical use to traders now? It does suggest that the most recent rally might not go very far as that prior top could have marked the high for some time to come - such an outcome is a tendency when you see this formation. Not for nothing, did someone call this the kiss-of-death trendline. Time will tell on what further rally potential there is.
NASDAQ and RALLIES TO A PRIOR (DOWNSIDE) GAP -
The Nasdaq Composite rallied to above this gap area - the gap did not act as resistance. The saying is that gaps get "filled" - but sometimes not MORE than that, as this area may be stubborn resistance for some period of time. You may have noticed that the Nasdaq 100 (NDX) trades the most "technically". We need compare the two charts - the Composite and Nasdaq 100.
This was not the most reliable "signal" for a bottom as there was nothing in the pattern that might confirm a bottom there. But the oversold reading did signal the exact (down) swing low.
NASDAQ 100 (NDX) -
Gaps sometimes don't get filled in completely, contrary to the saying that they do. The more significant is the resistance, the more they tend NOT to.
You may have also heard me say that I like to see two CONSECUTIVE days where the close is above or below some support or resistance point of significance - this because of the tendency, especially in Stock Index futures, for stop-loss orders to be elected (activated) and for the resulting buying or selling to take the Index (or stock) only temporarily over the point.
Zooming in on the Nasdaq 100 (NDX) chart below shows us that there were NOT such two consecutive days with closes above the 21-day average. This is another example of a pattern not showing up that you would like to have - to stay long NDX calls in this case. This pattern made me at least want to exit calls at this point. It would have possibly got me into puts - at this point I could exit with a small loss if the rally DID develop further.
My Call to Put Sentiment Indicator made its last peak (noted with the red down arrow) on 2/7, two days ahead of today's reversal. This indicator tends to peak, or bottom, 1-5 trading days before a reversal. So, it was right on "schedule"!
The goal is to see Patterns and Indicators "confirm" each other by at least two key technical aspects, of Pattern, Overbought/oversold, Volume or Sentiment, suggest a similar thing. We assume a trend will continue until it reverses. Highlighting the potential or likelihood of an UPCOMING reversal is very valuable to option traders.
Option traders benefit the most from ANTICIPATING a reversal, before option premiums get inflated after a (trend) reversal is already apparent or suspected.
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to Contact Support with 'Leigh Stevens' in the Subject line.
Good Trading Success!!