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Measuring 'Resistance' at New Highs

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The concept of resistance as it's usually defined and understood is meaningless when a stock or index is at a new high, or a new high for a move. Backing up just a bit, prices in any market or financial instrument move in a series of peaks and troughs and the direction of those peaks and lows determine the trend.

Prior troughs, or reaction lows, are usually thought of as support; i.e., a level or area on a price chart under the (current) market price where buying interest is sufficiently strong to overcome selling pressure. The result is a decline is halted and prices turn back up again.

Conversely, resistance is usually identified as a prior peak and represents a price level or area OVER the market where selling pressure overcomes buying and a price advance is turned back.

Case in point is how the prior high at 856 in the Russell 2000 Index (RUT) acted as resistance recently and marked the exact recent high; a sharp downside correction followed although today's rebound from it's intraday low was equally strong.

Well, boys and girls, ladies and gentlemen, how in the heck can you measure or guess at 'resistance' when you keep going to record highs as in the New York Composite Index (NYA), the Dow 30 (INDU) and lately the S&P 500 (SPX)? This is pretty much the same as saying how do you measure a next upside OBJECTIVE for a stock or an index at a new high. Given a prior all-time weekly closing high in SPX at 1527 (March of 2000) when SPX was at 1427, it was easy to figure that the Index had the potential for a 100 point move up to 1527, which was assumed to be RESISTANCE.

In trading, a way to measure objectives is all-important, because you can't begin to define RISK on a trade, unless you have some way of at least estimating an objective. You can't estimate your risk to reward potential and keep it a reasonable 1:3 or 1:4 ratio (or better) unless you can estimate an upside or downside price target. Those of you who think that it's all a crap shoot anyway and you can't really estimate such things, probably look at trading as akin to gambling and probably do as well in trading, in fact, as you would do in Las Vegas casinos.
I defy anyone to tell me that traders who make big profits year after year are just lucky. End of story there.

Last week (Wed 7/11 Trader's Corner) I wrote about RECTANGLE chart patterns, where there is a pause in a dominant up or down trend and prices go sideways for some time in a trading range, hitting tops in the same area 2-3 or more times and bottoms in the same area 2-3 or more times. A break out to the upside (above resistance) or the downside (below support) suggests a strong likelihood for a continuation of that move. A rule of thumb for a 'minimum' upside or downside breakout objective is to measure the point distance between the multiple highs and lows of a trading range and add or subtract that distance from the top or bottom end of that price range.

An example of an upside breakout above the top end of such a trading range or rectangle pattern is seen in the S&P 100 (OEX) daily chart below:
As you can see multiple highs were made in the 707 area and lows around 685, for a price range of 22 points. Given the recent decisive upside penetration of the upper end of this pattern, a 'measured move' objective is to 729, or a move above 707 that is at least equal to the 22 points that was the distance covered in the last several price swings between lows and highs. This is pretty simple and more importantly often does measure a next price target, a minimum target, for a next advance.

The foregoing does not imply that such a minimum objective for OEX once it pierces the upper end of the trading range or rectangle pattern is a next resistance area for the Index. Rather than a projected resistance, the estimate for a next upswing is just a possible minimum upside objective.

PRICE CHANNELS

There is a way to also project a price area that might act as a next area of resistance even though prices are in new high ground, either on an all-time basis or at a new high for a move where the old high is well above current levels.

A up trendline is simply a line that connects two or more lows in a rising trend; a line connecting 3 or more lows is considered to be optimal in showing an area of support. This is another way of measuring support. A down trendline is a line connecting 2-3 or more highs in a falling trend. An 'internal' up or down trendline connects the MOST number of highs or lows, so may bisect or cut through one or more bars on a chart.

An uptrend channel is constructed simply by constructing a PARALLEL line to an up trendline that touches ONE or more tops that date from the
BEGINNING of an up trendline. Where prices rise to the top end of such a channel is often an area where an advance will run into selling pressure or resistance. This may be temporary only or simply mark a slowdown in the rate of upward price ascent such that prices hug the upper trendline. Prices can break out above the upper boundary of an uptrend channel also of course.

Oil stocks, as measured by the CBOE Oil Index (OIX) on a weekly chart basis, have been in a well-defined uptrend since late-2003. A nearly equally well-defined internal up trendline drawn parallel to OIX's up trendline has marked resistance multiple times, until the recent accelerated surge above the upper trend channel boundary.

You can see that nearly all the spikes above the upper channel line in the OIX weekly chart below that came before early-June were NOT on a weekly closing basis. However, this latest 6-week old spurt higher has ALL weekly closes above the now-pierced upper trend channel boundary. At some point, when prices stop advancing, a new upper trend channel line may be constructed. This channel will be much broader than before and project future highs that could be well above current levels. I always thought that crude oil projected to $100 a barrel.

Looking at the S&P 500 (SPX) weekly chart shows the best recent example of one of our key stock indexes making a move to a new all-time high. Not on an inflation-adjusted basis, where it's above 17 percent under the old high, but that's another story.

The old closing weekly high in SPX has now been well exceeded. However, the upper boundary of the weekly uptrend channel would suggest that resistance may come next in the near-term if SPX approaches a weekly close of 1570. The 1600 area might be reached but the Index have trouble closing above 1570 for the week, again in the relatively near term. Trendlines rise over time, especially steep ones like seen below, so we have to define the time frame of when we are projecting a price intersection to one of these trendlines.

The Dow's weekly chart uptrend channel seen below, which is a High-Low-Close (HLC) chart (not a line or close-only chart as with SPX above), is suggesting that resistance may be hit in next week or two if INDU gets to the 14,100 area. This is a little more precise of a targeted resistance, which is true of HLC chart trendlines in general.

Focusing on weekly AND daily charts in cases where there are a well-defined uptrend channels, we've seen recent highs seemingly meet resistance at their upper trend channel boundaries in some of the major indexes. Whether selling pressures here are temporary or not remains to be seen. I don't start buying puts on such patterns or the like, but it does make me pay close attention to the POSSIBILITY that an index may be topping, especially when a market is showing overbought indications on the Relative Strength Index indicator; or, is showing a bearish price/RSI divergence like seen below.

I am mostly going to put the most attention to what happens to the lead indexes like the S&P 500 and Dow on a weekly chart basis. Besides, we 'all' know the market will (tend to) top in September or October! Maybe when oil hits $90 a barrel. 'What me worry', might take a hit when we got $4.00 a gallon gas and heating costs could go through the roof.

The S&P 100 (OEX) Weekly chart uptrend channel would suggest that this week's high is right at some resistance or where some selling pressure might come in. There has been a tendency in recent months for the OEX to back off a bit from this weekly upper resistance trendline but then rebound to the upper end of its channel again. Stay tuned on this!

In the Nasdaq, both the Composite (COMP) and in the Nas 100 (NDX) Index, recent highs were at or near the upper boundaries of their Daily chart uptrend channel lines. These upper trendlines suggest potential resistance. What we don't know yet is whether this leads to a temporary sell off, and note how strongly COMP rebounded today from its intraday low, or will mark a more significant top over time. Even if temporary, it can be very useful information to have known yesterday that the high was at or very close to some resistance. At least today's downside reaction wouldn't be a complete surprise. I hate surprises unless it's a present!

The Nasdaq 100 (NDX) has the same or similar pattern to what is seen in the Composite chart above. It wasnt surprising to me yesterday that the Composite started falling off from its high and then followed through in a decline today. NDX is holding up quite well however, as the Index has barely backed off from the top end of its channel and may be poised to break out above it. Stay tuned on that!

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GOOD TRADING SUCCESS!
 

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