Option Investor
Trader's Corner

Projecting Potential Price Targets in a Runaway Move

HAVING TROUBLE PRINTING?
Printer friendly version

I've gotten some mails on how I might project some kind of 'ultimate' or next price objectives or 'resistances' for this runaway bull market we're in, at least in the Dow and S&P stocks. You can tell that the public is not into this market yet in a major way by the fact that the institutional big-cap favorites are the ones seemingly going to the moon. Well, we can't say that there's no 'public' money in this market, it's just that most of it is in the hands of professional fund managers, who are steering a lot of mutual funds invested via 401k.

There are basically just two circumstances in a market move:
1. The Stock Index being looked at is in new all-time high ground like the Dow 30 Industrials (INDU), finally matching the Dow Transports (TRAN).
2. The Stock Index is still RETRACING some part of a prior move; in our current situation, a percentage of the prior decline.

For coming up with some next price targets or objectives for situation #1, a market in new high ground, potential ways to calculate further objectives or (potential) 'resistance' include:

1. Drawing or projecting the top end of a bullish uptrend (price) channel.
2. Projecting a "pivot point" and subsequent potential resistance based on a 'mechanical' formula involving a previous price range such the prior week or month. In my last Trader's Corner, which was TWO weeks ago, I described John Person's pivot point (PP) method of projecting 2 levels of resistance and 2 levels of support above and below the PP.

More on this method shortly; my prior (10/11/06) article can be found by going back to your Wednesday 10/11 Option Investor daily market letter or view it online by clicking here.

3. The number three price target method for a move in new high ground: fibonacci targets. This is the least precise in my experience but is worth describing. Very often the second move in a 'typical' 3-part advance will equal a fibonacci 1.618 times the numerical value of the first move or leg. The first advance in INDU was from the Oct. '02 low at 7197.5 up to a high of 10,753 in Feb. '04; this equaled 3,555.5 points. The next up leg started from 9,708.4 in late-Oct.'04. 1.618 X 3,555.5 = 5,752.8; this figure added to the low of the second up leg gives us a next projected target (for the second up 'leg') in INDU of 15,461.2.

Going back to methods # 1 and #2 for the Dow, which is the major stock index in new high ground, what can we project?

#1: UPPER END OF THE DOW'S WEEKLY PROJECTED UPTREND CHANNEL(S):
Opps! On a weekly chart basis seen below, the action over last week and this week has created an upside penetration of the lowest projected upper line of INDU's uptrend channel. That (projected) upper line is a line parallel to the lower trendline and touching the highest high(s) showing. The lower line is drawn though at least 2-3 lows.

Potential resistance implied by the next higher trend channel line intersects around 12,235. An upside penetration of 12,235 especially on a weekly closing basis would suggest a next potential for INDU up to the 12,720 area in the coming period IF I construct the final highest channel line by using a trendline touching the highs of a still-earlier period near the start of 2004.

#2: PROJECTING A "PIVOT POINT" AND SUBSEQUENT POTENTIAL RESISTANCE POINTS:

A Commodity (Futures) Trading Advisor (CTA) named John Person has a particular method of determining pivot points in stocks and indexes. His method/formula for determining 2 support and 2 resistance levels for the coming day, week or month is as follows:

To find the pivot point number used to determine current support/resistance levels based on the Daily, Weekly or Monthly HLC (High, Low and Close), the following formula is used:

Pivot Point (PP) = [High (H) + Low (L) + Close (C) divided by (/) 3]
The first resistance level (R1) = (PP X 2) - L
The second resistance level (R2) = PP + H L

The first support level (S1) = (PP X 2) - H
The second support level (S2) = PP - H + L

The results of using LAST week's High, Low and Close figures for THIS week's Pivot Point (PP) and this week's R1 & R2 resistance points for the Dow are shown on the next chart, although only the second resistance (R2) is shown as Resistance point 1, at 12,072, has already been surpassed:

With the S&P 100 and the Nasdaq 100 Indexes, we can execute the Fibonacci RETRACEMENTS of their prior declines, both as potential next targets and as potential major resistance points, as neither index is in new high ground. I employ a favored method, that of retracements of a prior move (a decline in this case), which is Index situation number 2 that I begin discussing above. Unlike the Dow, OEX and NDX are NOT in new high ground:

The most common retracements used are the fibonacci levels of .38, .5 and .612 or 38, 50 and 62 percent. Sometimes I measure a 25% retracement and very commonly a 66% retracement, which is more of an influence of WD Gann's work of many years back.

If a return move pierces the 25% retracement level in a stock or Index, assume it will carry to at least a 38% retracement. In turn, moving higher than a 38% retracement, assume that the stock or Index can retrace at least a half/50% retracement. Above 50%, I start to look for a 62 to 66 percent retracement. Above a 2/3rds retracement (66%), I start looking for a 100% retracement or a move back to the prior high in the case of an upside retracement of a prior decline, which is the situation in the current market.

Looking at the S&P 100 Index (OEX) Monthly chart next, the upside targets and potential intermediate to major resistance points are at 670, then 690. A weekly and monthly close above 690 would suggest an eventual potential for a move to 850 or a re-test of the prior all-time high, which is not my current expectation but should be considered in the retracement method and this way of looking at further rally potential (assuming there was an eventual decisive upside penetration of 690 in OEX).

By the way, the method I described earlier of projecting an upper trend channel line, gives the look of potential near resistance in the S&P 500 (SPX) as follows in the next chart; at the red down arrow:

But I digress! I was going to look next, and lastly, at the Fibonacci retracement situation for the Nasdaq 100 (NDX) and talk about a 'tale of two cities'!: the big cap NDX, heavily tech stock oriented index is really lagging its opposite number in the S&P. Perhaps those PE's in 1999/2000 were a TAD bit high!

NDX is only just now approaching a 25% retracement of its prior decline, at least one based on the arithmetic scale (not the semi-logarithmic scale, measuring equal percentage moves). We can assume that the 1800 level in NDX may offer resistance. I anticipate that this level if reached will bring in increased selling.

At 1800, the consideration of NDX having retraced a quarter of the prior decline, PLUS the resistance implied by the previously broken up trendline, or the 'kiss of death' trendline (a name that I has a certain ring to it), suggests where we may see a next top or the start of at least a tradable pullback/downswing. Since NDX is just starting to hit this resistance trendline and we see a divergence shaping up this week as Nasdaq struggles to eke out further gains, perhaps 1800 won't be quite reached. Stay tuned on that!

Chances of getting above 1800 and then taking as a next eventual NDX target a move equaling a 38 percent retracement; i.e., to 2333? It could happen if tech sprouts wings. Could happen but right now not enough Nasdaq stocks seem completely on fire for that. This idle speculation aside, watch the 1800 area, if reached, as a significant milestone level.


GOOD TRADING SUCCESS!

** E-MAIL QUESTIONS/COMMENTS **
Please send any technical and Index-related questions for answer in Trader's Corner articles to Contact Support with 'Leigh Stevens' in the Subject line.
 

Trader's Corner Archives