Lately, on Sunday afternoons I've taken to looking for any key technical trading concepts from the past week that I can bring to the forefront. Weekends are when I have more time to write about trade concepts and you (hopefully) have some time to read them.
'STAND ALONE' REVERSAL CLUES
There are many times when just 1-2 indexes provide chart clues as to trend changes for the overall Market. For example, I wrote last week (3/11/12 Trader's Corner) about my 'hunch' that there would be a second leg down after the Dow fell to 12735 (lowest intraday low) from the 13050 area, then rebounded back to the 13000 area. I was guessing that we would see a 'typical' a-b-c (down-up-down) corrective pattern.
I then guessed that the market would zag instead of zig and fall back to the prior lows or lower (and 'throw off' its overbought condition) before resuming its climb to 13000 and beyond, especially back to the major top of late-2007 in the 14000 area.
However, there WAS a pattern in the Nasdaq Composite (COMP) (and the Russell 2000), where these two indices found support and reversed to the upside, from their up trendlines. Their charts are coming up...
It's often the case that just 1-2 indexes have chart patterns that provide the trading edge of seeing a conclusion to a correction of the dominant trend.
When the S&P 500 (SPX), OEX, the Dow and the Nasdaq 100 ALL showed the same (trendline break) pattern, I leaned to the conclusion that the Market was going to have more of a correction than actually developed.
Another chart example of an index that pierced its up trendline fairly decisively is provided by the Nasdaq 100 (NDX). The chart below shows price action only through 3/7/12 and therefore isn't up to date; i.e., through 3/16. When I update the chart of course we see the recovery rally to right back above the prior up trendline.
The overall market is still showing good strength and a rapid recovery from any panic sell offs; an example is of course seen in the updated NDX chart.
So why believe the COMP chart below back on 3/6/12, when it alone (plus the Russell 2000) HELD its up trendline, with the next day's action (3/7) suggesting an end to the correction? Good question!
I have found in many instances over many years that when it comes to trendlines sometimes just 1 or two chart patterns in the major indexes 'tell' the story (in that market cycle) as to what's what with corrections to the dominant trend. You can see this dynamic in other ways as different times ...
Back in late-November (2011), it looked like SPX achieved a decisive upside breakout above its down trendline. An upside reversal was later 'confirmed' by a pullback to the trendline and where the (prior) SPX resistance trendline has 'become' support (in the low-1200 area). The rally that followed this subsequent pullback was later proof of this.
However, the Nas Composite (COMP) chart, where the same rally seen with SPX rally stopped dead in tracks AT the Composite's down trendline, was suggesting that an emerging uptrend was still in process.
FINDING POTENTIAL 'RESISTANCE' POINTS AT NEW HIGHS
Someone asked me about comments I made in my latest (3/17/12) Index Wrap that, even though the major indexes are at new highs for this move, there were some indications of potential technical 'resistance' that could be found, especially on a weekly chart basis.
Just as seen above where SPX resistance, once penetrated, 'became' later support (or, in the case of SPX above, a resistance trendline, once penetrated 'became' later support), we can find other examples of this concept as it applies to locating potential resistances ahead.
Time will of course tell if the Nas Composite will hit the wall around 3080k-3100 as highlighted on my weekly COMP chart below. The 3080-3100 area as a 'natural' place for the Index to find resistance/selling pressures? Stay tuned!
An even more well-defined (by the number of lows) up trendline that got pieced is seen in SPX, also on a weekly chart basis. Resistance on (if) a return to the previously pierced up trendline is implied for the 1450 area in the coming 1-2 weeks.
Sometimes, a fresh look will show a quite different picture as far as whether an Index, in this case the Dow 30 Average (INDU), is about to hit possible resistance or not. Below is the daily chart I was working with for INDU until today when I took a fresh look. The way I had constructed the upper trendline suggested resistance right where INDU faltered a bit on Friday.
The pattern of these two rising and converging trendlines seen below (from my 3/17/12 Index Wrap) looks like a bearish rising wedge. One that hadn't been penetrated to the upside and where the upper trendline looks like potential resistance. However, this interpretation lopped off or ignored the higher highs seen to the far left. A new look suggests that I re-draw the upper trendline which follows this chart.
Switching to a newly rendered Dow chart seen below, I've come to a different interpretation for the chart. A rising wedge pattern is still seen, but more clearly traced out with better 'definition' to the upper trendline.
With the below re-drawn chart, the pattern now suggests that INDU has broken out ABOVE the upper resistance trendline, 'negating' the rising bearish wedge pattern.
Going back to the concept of resistance once penetrated 'becoming' support on subsequent pullbacks, this chart pegs support for the 13140 area on a pullback to the prior resistance trendline.
GOOD TRADING SUCCESS!