Option Investor
Trader's Corner

Hourly Charts and 'Double Trendline' Resistance

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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.

Constant or frequent comparisons of the hourly versus daily chart is invaluable to trading options; I use examples here of trading index options, but the same technical consideration apply to either indexes or individual stock chart analysis. I use bar charts, but candlestick charts will do also as they have same date (open, high, low, close), just displayed differently.

SPX on the daily chart did not get quite back to its trendline, at the red down arrow as noted on the chart below. This is its 'internal' trendline; one connecting the MOST number of highs or lows and which will therefore cut through some bar(s). Failure of prices to hold ABOVE the 21-day moving average is usually negative for the trend, but is not CONCLUSIVE for a top by any means.

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

The steepest hourly up trendline (T1), was the first to be broken in this sort of 'fan' of trendlines. Trendline 2 (T2 on the chart below) was the next to be pierced. But, after that it seemed that there was a recovery rally underway.

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.

The recent rally didn't get close to the daily chart down trendline but, and this was an important note I made in my weekend Index Trader column, the rally failed to carry above the key 21-day moving average on a closing basis. This suggested faltering momentum, but not the kind of top that was formed; i.e., one that would lead to such a sharp fall.

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.

The various trendlines arrayed in the same kind of 'fan' as seen in the SPX hourly chart seen already, was telling for the OEX as well. Down trendline 1 (T1) was the first line drawn. Once the third hourly top formed at the red down arrow, the best-fit 'internal' down trendline (connecting the most number of highs) was the lower red down sloping line.

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.

INDU has been in a well-defined up trend and has mostly stayed within or between two channel lines; except, in a likely warning that the trend was getting 'shaky', for the brief break below this line last month. But, a double bottom and prices quickly rebounded. There was in THIS daily chart a bearish warning as the recent rally reversed shy of the internal down trendline at the red arrow. The second lower trendline was drawn when the two-day peak was made shown in the circle.

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.

The same kind of price pattern as in the S&P charts was seen. When prices failed at both the hourly down trendline and the resistance trendline up from the bottom (lower left), this was the end of the line for the rally. The break below the low end of the consolidation that followed, or the large number of hourly lows in the same area, was the 'confirming' technical breakdown.

The Daily Nasdaq Composite (COMP) chart didn't suggest a top formation in its pattern. At least the rally did not 'fail' at resistance. The inability to maintain price momentum above its 21-day moving average put us on alert that the emerging uptrend might not last. But, there was no real technical 'damage' until the up trendline was pierced. It took zeroing in so to speak, on the hourly chart to really see what was happening.

The hourly chart shows quite a different picture in that the hourly highs and lows since the early-August peak have traced out a wide-ranging broad DOWNTREND channel. I thought COMP was going to break out above the upper channel line this time. Instead, the rally failed around the 2165 resistance. A third point or cluster of either a high(s) or low(s), makes for the most 'definitive' trendline. We got it here!

As is often the case, the Nas 100 or NDX makes a telling technical pattern. A double top was made in the 100 index with the rally failure in the 1619 area, at the prior peak. Here the daily chart was quite helpful. At this juncture, with the failure of the rally at a prior top, I was not going to wait and see if my 1560 stop was going to take me out of NDX calls.

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.

The up trendline that was in effect, then pierced twice was still showing the prior rate of ascent and I kept it on my hourly NDX chart. The return to that line, what I sometimes call the 'kiss of death' trendline, coupled with the double top, was highly suggestive of a top. Those who bought puts in this area of Tuesday's high: well done, great trade!

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!

Please send any technical and Index-related questions for possible use in my next Trader's Corner article to support@optioninvestor.com with 'Leigh Stevens' in the Subject line.

** Good Trading Success! **

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