THE major consideration that got me into technical analysis as a separate and additional study to study of market fundamentals (e.g., economic growth trends, earnings trends, etc.) was that I lacked 'objective criteria' for when to get out of a position. This is another way of saying that I had no clear cut criteria for when a trend reversed from up to down, down to up.
This was when I was trading the futures markets more than stocks, so it was not that I had no concern about having a time-limited position. Of course options present even more of a challenge due to amount of built in time premium, which is a more subjective evaluation and 'premium' given to the seller of the option, than is true of the 'carrying charge' premium of physical commodities or even financials like bond and stock futures.
I've heard so many stories (and I remember my own!) of people that road a big tech stock position from hugely profitable, relative to their cost basis, to a fraction of what the stock or stock portfolio was worth in 2000. This was because they 'believed' in the tech 'revolution' or believed in the individual company's 'story'; i.e., their business model, their earnings potential, etc. There is nearly always a 'belief' involved, rather than simple ignorance, not knowing what to do, etc.
REMEMBER THIS CHART PICTURE?
After prices stabilized and rebounded after the first big break, a number of weekly lows then defined the next lower (less steep) trendline. You can see 1-week's sharp fall under this trendline, but only one, until a couple of months later when the lowest of the 3 trendlines also gave way. This line was constructed with our 'minimum' of 2 points, but ended up only pointed to areas of resistance at the weekly highs for a few weeks.
So, the first 'technical' method I started paying close attention to involved trendlines. For example, when an up or down trendline got pierced, especially a long-standing one. I learned to look not only at 'external' trendlines but at 'internal' or 'best-fit' trendlines.
External trendlines are straight lines that connect only a minimum of 2 (3 is best) or more of the lowest lows or the highest highs. An internal, best-fit, trendline connects the MOST number of highs or lows and may cut through some bars (of a bar or candlestick chart). External trendlines are pretty much the only thing you'll see used with Point & Figure charts; e.g., from Jeff Bailey's Monday 7/10 Market Wrap commentary.
BEFORE CONTINUING, A NOTE ON MY INDEX TRADER ARTICLES:
I wrote in my weekend Index Trader ("What Market?") that the Nasdaq and NYSE Markets as represented by the Nasdaq Composite (COMP) and S&P 500 (SPX) respectively, were diverging more than usual. Both markets have been having some trouble gaining upside traction, but it's especially true of the Nasdaq. If you took out the oil, gold and other commodity related (e.g., ADM) stocks out of the S&P Index, it would look to be struggling too.
In my Wednesday Trader's Corner articles I typically also work in a technical midweek update to my weekend Index Trader. Especially so when I can demonstrate the relevant technical/trader tools discussed here. My most recent Index Trader can be seen by clicking here.
NASDAQ AND S&P TRENDS ON CURRENT LONG-TERM CHARTS:
When internal dynamics (fundamentals) change, the angle becomes less steep and price momentum slows. Traders have discovered that momentum or trend changes keep going until a new equilibrium or trendline is established.
The SECOND OBJECTIVE RULE FOR TREND CHANGES has nothing to do with trendlines. A major uptrend shifts from up to down when the last major (downswing) low is exceeded. Charles Dow would say that only the Close matters.
I look at breaks of both the prior Close and the Low above. The key prior weekly Close is 2065. A Friday close under 2065 in COMP could be the confirmation so to speak of a shift in the major Nasdaq trend from up to down. A further fall below 2025 would be a second confirming event.
There is another consideration in the Nasdaq weekly chart above. The 8-week RSI is showing an 'oversold' extreme, suggesting that a second down leg would more likely come, if it comes at all, after an oversold type rebound; e.g., back up to 2200, maybe even 2300. 'Oversold' or 'overbought' are secondary technical indicators, but worth paying attention to for possible short-term upside reversals back above up trendlines on the DAILY charts.
THE S&P AND OTHER KEY INDEXES LONG-TERM TRENDLINES:
1245 is key must hold support on a weekly CLOSING basis for SPX. There has been so far one weekly close at this level, but prices rebounded in the following week.
The Dow Industrials (INDU) seems to be trying to hold above it's dominant long-term up trendline and recent dips under the support trendline have been followed by rallies.
A weekly INDU Close below 10,950 would be under its up trendline and suggest that this narrow selection of blue chip stocks was now also losing upside momentum:
AH-OH! NAS 100 IS SLIPPING BOTH WAYS.
If we get further weakness into the end of this week, could this be 'confirming' a bear market ahead, at least in Tech? Maybe so, although it's not completely accurate to say that Nasdaq equals just technology stocks.
AND NOW FOR SOMETHING COMPLETELY DIFFERENT:
Finally, the earnings to date for Q2, the many earnings 'warnings', slowing housing, relentless rise in oil prices, the threat of more rate hikes, etc. seems to have sunk in and traders have picked up their put activity considerably. And resulting in a falling ratio of CBOE daily equities call volume relative to put volumes, and resulting in the start of a bearish outlook in the extreme as seen in the lowermost of my indicators above.
Trendline breaks are EARLY warnings of 'trouble in River City' or slowing momentum. Sentiment doesn't usually LEAD momentum as much as FOLLOW momentum. Why this is the case is another story for another time. Thanks for your e-mails, but they are too FEW, meaning I would like to hear from you!
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