Someone e-mailed me this morning (Wed.) asking about what technically might have tipped us off to this recent rout. In my last Index Trader column I had been bullish, although I had some qualifications about the S&P 100 (OEX) needing to get above it's 21-day moving average and a note on prior tops in the Nasdaq 100 (NDX) that had to be cleared. My 'Index Trader' is seen only on the OIN web site (although you can click to it in the Sat/Sun OIN Newsletter). Anyway GOOD QUESTION!
And it leads me in turn to ask, as I did to this person and I ask now of any Subscribers who would e-mail a response, how many are keeping an eye on HOURLY charts. If you have either an online charting application or one residing on your PC and you connect to a data feed, I assume you can view an hourly chart covering at least the last 30-days. YES?
If not, get something else to chart with! If you look at charts online, it can be impossible to, for example, see more than a 10-day hourly chart. A bit of a handicap this. I keep a year's worth of intraday price data so I can view very long-term hourly charts. WHY? Sometimes you see a top looming, or 'building' that you DON'T see, or see as well on a daily chart. Just like you sometimes see things on a weekly chart, like a break of a major trendline that you don't see, or see as well, on a daily chart.
I had a technical analyst friend at PaineWebber, who covered individual stocks (where I covered the indexes mostly), who kept an hourly chart on the walls of his office. It went round and down and up and down. He kept pasting more graph paper to extend it. I was wondering when it (this hourly chart) was going to go out into the hallway!
As I've often said, reversal days tend to come on Tuesday and Thursdays often enough to notice it again this week. WHY? No earthly reason that I know of! But, by using BOTH daily AND hourly charts, there are few times that you will not see a top or bottom forming. Even if you only able to look at the charts at night after work. (Few are professional traders, but some can look at the market pretty often during the day.)
While hourly chart and trendline analysis showed a top forming, they did not quite tip us to the STEEPNESS of the drop that followed. By recent tops having TWO different trendlines, of different types, as I'll show (what I call 'DOUBLE' trendline resistances), this can be a tip off to a major reversal point.
Fundamentally, oil prices had been moderating but the FED was not 'moderating' according to some recent press. That coupled with recent analysis that the housing rate-of-increase was SLOWING, was the key I believe to what has spooked the market so much.
I would also note that I usually ONLY buy calls or puts when I see bottom or top chart patterns forming, especially at the tops and bottoms of trend channels in order that my RISK is limited relative to my entry, as these are the points where I can set a close-by exit or STOP. Linda Piazza, had a good read in her Trader's Corner article of 9/24 on determining stop/exit points.
HOURLY CHARTS versus DAILY:
S&P 500 (SPX) DAILY CHART:
Tuesday's drop fell under 1220, breaking the dashed blue trendline above, which I had kept on the charts as all closes but one had held above. However, trendline 2 (T2) was the lower up trendline to work withy. The break of 1210-1212 took prices through T2 and suggested a reversal. The close under the prior low at 1200 is probably conclusive for a technical reversal (of the trend). HOWEVER, IT IS THE HOURLY CHART THAT 'SHOWED' THE TOP
S&P 500 (SPX) HOURLY CHART:
UNTIL that is, the rally reversed at BOTH the dashed (red) down from the early-Sept top AND the third trendline (T3) drawn through the recent hourly tops connected to the late-Aug low; this was showing a 'line' of resistance or the top of an (hourly) uptrend channel. The 'double' trendline resistance is at the red down arrow. The rally failure was really from where these two trendlines intersected.
I use an hourly RSI, with 'length' set to '21' (i.e., a 21-hour Relative Strength Index) to show when an overbought/oversold condition exists in the short to intermediate-term.
S&P 100 (OEX) DAILY CHART:
The most that the RSI on the daily chart was showing us was a pattern of declining 'Relative Strength', as each peak of the RSI was less than the preceding one.
S&P 100 (OEX) HOURLY CHART:
Last week's rally failed at the juncture around this hourly down trendline AND the line coming up off the last-August bottom, connecting the recent hourly highs. The sideways drift then led to the point where the bottom fell out.
DOW JONES INDUSTRIALS (INDU) DAILY CHART:
Still, this price action was not conclusive for a top, although the decisive downside penetration of the 21-day moving average was a (trend-reversal) warning which became conclusive with today's follow through fall below the low end of the uptrend channel and break of the prior lows to boot, by the close.
Still, the top formation was BEST seen on the hourly chart.
DOW JONES INDUSTRIALS (INDU) HOURLY CHART:
NASDAQ COMPOSITE (COMP) INDEX DAILY CHART:
NASDAQ COMPOSITE (COMP) INDEX HOURLY CHART:
NASDAQ 100 (NDX) INDEX DAILY CHART:
It does remain to be seen what happens at the lower channel line on the daily chart above; today's close was just under this key up trendline. The close on the lows was not encouraging, but there is not a conclusive reversal of the trend until 1550 is pierced again.
NASDAQ 100 (NDX) INDEX HOURLY CHART:
The top pattern had a related RSI 'signal' by the overbought '70' reading seen on the 21-hour Relative Strength Index above. To get ONE good 'confirming' signal on an indicator like this makes its use completely worthwhile!
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