Before I get into my topic de jour, I have some odds and ends that I thought of possible interest. You can skip over these first 3 items if you want to get immediately to the 'title' subject.

DOW 10,000 NO SURPRISE:

It was WD Gann (1878-1955), of 'Gann Lines' fame so to speak, who to my knowledge was the first well-known voice to talk about the tendency for prices to go to major round numbers. Gann was a legendary speculator who had an uncanny ability to pick exact upside or downside targets for stocks and commodities.

Gann wrote about the tendency for prices to go to important even round numbers. For example, a stock, or the price of oil, that has never traded above $75 goes above that level for the first time. It's a better than even bet the item will reach $100. It seemed 'obvious' to me given my early influence by Gann analysis that the S&P 100 (OEX) would reach 500 when it climbed above 450; the S&P 500 would reach 1000 when it sailed above 950 and so on. It then also seemed like a no-brainer that the Dow would reach 10,000 and above when it climbed above 9500.

As to why this is true, many traders and fund investors have noticed this tendency and tend to be willing to keep bidding up the item in question until it hits some big number perceived as possible resistance. It's a self-fulfilling prophecy? I think there's more to it than this, but this is one obvious dynamic.

A final note on the Dow 30 (INDU): If you are having trouble figuring out where the overall market may be headed and who doesn't, it's relatively easy, or at least a finite task, to look at the charts of the 30 stocks comprising INDU. If 10 are in mixed trends, 5 are struggling or in declines, but 15 are in strong uptrends, there's more upside in the Dow.

If the Dow looks capable of tacking on another 500 points, the S&P 500 (SPX) is good for 50 points higher; 10,000 divided by 1000 is 10 and the SPX should tack on about 10 points for every 100 Dow points. You can make a similar rough rule-of-thumb upside projection for the other major indexes in the same way. INDU is a good way to start in terms of seeing overall market potential.

MAILBAG ITEM:

In my last Index Wrap of Saturday 10/3/09 I wrote this about the Russell 2000 (RUT): "If I had been looking at the 55-day fibonacci average which I find usually 'works' with the Russell 2000 (RUT) in terms of showing the strength or relative weakness of the its trend I'd have better pinpointed the SPX and COMP low (of last week)".

This prompted the following OIN Subscriber e-mail:

"I've never heard of a fibonacci daily average. Do most software/trading programs have it?"

MY REPLY:

"Fibonacci relates to the Fibonacci number series; i.e., the number progression where each number is the sum of the prior two, beginning with 1: 1,2,3, 5, 8, 13, 21, 34, 44, 55, etc. With a moving average you can set 'length', which is the number of trading periods or 'bars' that the indicator will reference (use) in its computation. There is no 'Fibonacci daily average' in terms of an indicator by that name. What I referring to in my (Index Wrap) comments was that I prefer the fibonacci number 55 as my LENGTH setting for the Russell 2000 (RUT) index in particular.

For the other major indexes I use the more common or well-known length setting of 50. While there isn't much difference between a 50 and 55-day moving average, 55 just seems to 'work' better for RUT in terms of suggesting where the index has or may have current or future support (buying interest) or resistance (selling interest)."

A further note is that last week I wasn't paying as much attention as I usually do to the 50 day moving average. I consider the 21, 50 (or 55) and 200-day moving averages as pivotal for the major stock indexes; e.g., in terms of suggesting potential support or resistance. Several of the major indexes found support and rebounded right from the area of their 50-day averages on the last market dip/pullback.

THEY AIN'T GETTIN RICH ON THE FLOOR NO MORE:

Being a New York Stock Exchange member and a Specialist making a market on key stocks on the NYSE floor used to be a road to sure riches. You often found sons of members becoming specialists like their fathers. The following graph suggests that it's tough all over in the new computer age as there's been a stark decline in the overall share of stock trading occurring on the NYSE itself and to a lesser degree on the NASDAQ exchange:

The above was from a NY Times article today and the source of the numbers are the exchanges involved.

As an ex-New Yorker and charter member of the Street of Dreams I know that it's an unsettling fact for some of my former colleagues and still New Yorkers that the New York Stock exchange, as the author of this article (Graham Bowley) put it, "the symbolic heart of New York’s financial industry, is getting smaller." He went on to say that "Young, fast-moving rivals are splintering its public marketplace and creating private markets that give big banks and investment funds an edge over ordinary investors."

"Some of the new trading venues, 'dark pools' as the industry calls them, are all but invisible. These stealth electronic markets enable sophisticated traders to buy and sell large blocks of stock in secrecy at lightning speed and the upstarts are utterly unlike the old-school Big Board, which is struggling to make its way as a for-profit corporation after centuries of ownership by its seat-holding members. Last year, NYSE Euronext lost $740 million."

OH GREAT, another advantage to the big money boys as opposed to the individual trader and investor! The article's author went on to say that "Wall Street" seems to be no longer a place, but a vast, worldwide network of money and information. TRUE. He also noted that some critics say that only the most sophisticated players are benefiting, able to execute their trades seconds before smaller investors and in private. Hey, you wonder why these big computerized hedge funds dominated by math 'quants' can make so much money? By doing thousands of trades for small increments of profit when their computer models detect small discrepancies in pairs trading; i.e., arbitrage.

ONE WAY TO TARGET 'RESISTANCE' AT NEW HIGHS:

My intended main Trader's Corner topic relates to the use of price channels and trendline use of a different sort. As you no doubt or probably know, an up trendline is simply a straight line connecting 2-3 or more pullback lows, with 3 points being more definitive, in a rising trend. An internal up trendline connects the greatest number of reaction lows in a rising trend. You absolutely need 3 or more lows to draw a trendline normally and the pullback LOWS are the points you connect. I should also note the lows could be Closing lows also as in a 'line' chart. (In a downtrend, trendlines connect the 2-3 or more rally highs and the trendline points downward.)

Just to make sure this point on a 'normal' up trendline is understood, the following chart of Google (GOOG) shows a clear cut up trendline. In the case of the daily bar (OHLC) chart of GOOG, there was one reaction low (the second one) that dipped a bit under the up trendline seen on the chart, so this line becomes a best-fit/'internal' up trendline in a technical sense.

Sometimes however, especially in a strong bull trend, there are repeated highs on the way up but few reaction lows (especially in the major stock indexes) that are deep enough to create a series of lows that would allow construction of an up trendline connecting 3 or more points.

So, how did I come up with the chart below where the LOWER rising trendline has only ONE point!? It's simply a different technique for the chart pattern involved. In the Dow chart below, there are a series of several higher highs that ALSO create a type of trendline that connects its series of intraday highs. We wouldn't call this an up trendline in the usual sense. It is a rising trendline but it doesn't show us potential support on PULLBACKS. Not in the way the up trendline in the Google chart above would suggest; e.g., trendline or technical support at 490 currently.

In a related trendline technique of constructing a trend channel, a rising trendline as seen above, is the starting point. A PARALLEL line is drawn that could intersect only a SINGLE low as is the case here. The two parallel lines then constitute INDU's daily chart uptrend 'channel'. Intersection of prices at the UPPER line suggests a rising line of RESISTANCE, currently at 10165 as noted at the red down arrow.

The aforementioned technique is a way that we can calculate a price area where there could be technical resistance or selling interest when we normally cannot pinpoint ANY resistance; i.e., when at a new high for a move. This potential resistance doesn't imply an area of 'hard' resistance so to speak. Rather it suggests an area where the upside momentum might slow if not suggest an area where a correction might develop.

Even knowing a price area where a trend might slow significantly, such as at an upper channel line, could end up being important when holding long calls. A significantly slowing trend can lead to a contraction of call premiums as expectations change for how much further upside may exist given the time to expiration.

In addition, the LOWER trend channel line can give an idea of where major technical support lies; e.g., currently around 9100. A break below the low end of the uptrend channel would suggest that the trend was reversing lower. Even this (lower channel) line drawn based on just one prior low could be telling.


GOOD TRADING SUCCESS!