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Trader's Corner

Further Update on Price/Trend Channels

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My Valentine's Day e-mail included a question/comment from one of our Subscribers. Believe me it is like a real 'Valentine' when I get your mail since my Inbox gets dusty for the LACK of mails from our dear readers, especially important to me since I often ponder on what Option Investor followers might find of interest from my store of knowledge; that store of knowledge, while imperfect is at your service.

SUBSCRIBER MAIL:
"I am just reading your index trader and wondering how to reconcile the potential roll-over of the NYA with "bouncing off support" of the SPX, OEX and INDU? One or some of the support/resistance line(s) must be violated, eh? How can the SPX bounce from support while the NYA retreats from resistance? It seems like a critical time, eh? Thanks for all your help."

MY COMMENTS:
Yes indeed, it seems that we live in the best of times and the worst of times, a strange phase that echoes in my ear from some distant shore.

The chart referred to was in my 'Index Trader' column from this past weekend (2/10/07) and can be perused on the OI web site by clicking here:

The CHART mentioned is of the long-term New York Composite Index (sym: NYA) and is shown again here and includes the range of this week to date, through Wednesday. I was looking at the NYA, since of the broadly based indices that of the New York Stock Exchange (NYSE) has been so clearly leading the overall market.

The NYSE Composite, along with the Dow of course, has been the only major index to go to a new all-time high since the 2000 market top. The Dow is so narrow, that of 30 stocks only, that the NYA is of major importance when it is 'leading' the market, as it shows the breadth of this rally in the mainstream economy stocks.

As can be seen by the strong move of this week in the NYA, the high for the week so far appears to breaking out above where I suggested that there might be resistance, as seen below.

The question of how this possible view suggested by my weekend analysis for the NYA WEEKLY chart, as being perhaps so far 'extended' in its advance as to suspect a tradable top ahead (maybe in the seasonal March time frame), jives with what I was also suggesting of the S&P 500 (SPX), the 100 (OEX) and the Dow 30 (INDU) 'bouncing off (technical) support'; an interesting and relevant question here. The idea of support was based on the Indexes reaching, and rebounding from, the low end of their DAILY chart uptrend channels. This will be shown in my last chart of the SPX.

There are TWO points I can make here.

Point #1 is to say, could well have gotten the 'resistance' line wrong in the NYA based on the way that I constructed the channel lines and that resistance may lie higher than the above chart would suggest, perhaps up at or near 10,000 in NYA for example; especially given that the even 100, 1,000 and 10,000 levels are often key levels of support and resistance.

Point #2 is that we have to look at the difference in the TIME FRAMES shown in the Weekly, Daily and Hourly charts (a chart time frame which I was working with last week in this column). We could be near a long-term high, but also near an intermediate to short-term low. I'll have more to say on this shortly.

You know the saying that there are liars, damn liars and statistics. Well, there are many ways to use, misuse, try out, and re-draw trendlines! I constructed the UPtrend trend CHANNEL in my first chart above based on the what I saw as the most dominant UP trendline; i.e., the most well-defined as there were 4 lows (or nearly so in the case of 'point 2') through which you could drawn a straight line or an uptrend line. Based on the up trendline I constructed in the above weekly NYA chart, I also constructed a potential upper end of a trend channel as a line PARALLEL to THIS lower trendline.

SUPPOSE I HAD CONSTRUCTED THE LOWER TRENDLINE IN A DIFFERENT WAY AND STARTED WITH THE LOWEST LOW SEEN IN THE FIRST CHART; AS OUTLINED IN THE CIRCLE ON THE LEFT, USING THE 2003 LOW AS MY STARTING POINT:

If I do this I then get a different ANGLE or rate of ascent as seen in my second chart below, also of the weekly NYA. Constructing an upper trendline relative to the lower trendline in this chart gives me a quite different upper line of potential resistance; one intersecting in the 10,000 area. This (chart) interpretation is NOW looking like the one that may better define potential resistance in the NYA.

This foregoing discussion would be relevant mostly IF SPX, OEX and INDU, as well as NDX and RUT, got up near the TOP end of their daily chart uptrend channels IN THE SAME TIME FRAME as NYA hit the top end of its trend channel. Since we are mostly all trading options, we are going to zero in the most on DAILY and HOURLY charts, but confirmation of the long-term chart of the leading market index would be dandy.

Charles Dow talked about there being THREE trends, major, intermediate and short-term. The long-term trend to him was like the tide of the ocean; if the tide is coming in, it is going to come in, even if takes some time to complete. The intermediate-trend to Dow was equivalent to the waves of the ocean. They go in and out, back and forth, but still the tide is raising (or lowering) the level of the water. The short-term trend is like the ripples of the waves. They also have a lot of to and fro movement, but the waves are going to take those ripples in the direction that they are going in.

Point #2 I made above relates to the point that we could be nearing a long-term HIGH as suggested by our analysis of multiyear weekly (or monthly) charts and also be at or near a short or intermediate-term LOW.

I showed the following chart of the price channel in the S&P 500 (SPX) in my most recent Index Trader column and suggested that the recent low was made right in the area of the Index's intermediate-term up trendline on the daily chart. This was a natural place for a low to set up and so represented a promising area to buy SPX calls, sell SPX puts, that kind of thing.

This recent low and subsequent rebound in SPX could still be in the context of a longer-term top setting up in the not too distant future. I still look to the March timeframe however, and SPX could still climb say to the 1500 area. Stay tuned on that!


GOOD TRADING SUCCESS!

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