MAILBAG QUESTION:

"You show them a lot, but trendlines seem of limited use on charts when you keep having to redraw them. When there's a down trendline suggesting resistance above on top of an up trend line showing support below, can you judge which way prices will go?"

MY RESPONSE:

It's true that trendlines have to be adjusted as the trend evolves but the effort is often worthwhile. Seeing a trendline get pierced may only be a temporary thing and the market or stock comes back. An example is seen below with bullish up trendlines being pierced twice, then redrawn at a less steep slope as another rally developed in the S&P 500 (SPX) chart.

Trendline #1 appeared to be 'working' as an internal up trendline (connecting the MOST number of lows) until SPX broke substantially below 1360. Trendline #2 was drawn through first 2, then 3 lows, but the Index then fell under this line breaking the presumed support of the up trendline.

The breaks below trendlines 1 and 2 were reversed by further rebounds. The usefulness of support (up) or resistance (down) trendlines comes in more when there's a clear cut trend REVERSAL at or near a trendline.

When we see in this chart where such reversals have happened, it's clear that this is to date with the bearish resistance (down) trendline, suggesting that there's not going to be further upside progress above this trendline (currently intersecting at 1390) any time soon. This in turn suggests to me that the Fed is not going to act soon either since Fed action would fundamentally form the rationale for a further up leg.

The hourly chart of SPX below also shows a redrawn up trendline and an approximate double bottom low which suggested a rebound could and did in fact happen. The hourly (close-only) line chart also has the same down trendline as seen on the daily chart above. Trendlines are one way of analyzing the trend. Another is to see the trend in terms of how overbought or oversold the index or stock is registering in terms of the 21-hour Relative Strength Index (RSI); or, a length setting of '13' as used on the daily SPX chart above.

In terms of both the hourly RSI ('length' setting: 21) or daily RSI ('length' setting: 13), the question I ask myself is what are the odds of a BREAKOUT above or below key trendlines given an overbought (or oversold) extreme?

I'd have to ANSWER that the probability of an upside breakout is low given the overbought extreme seen just recently. This summer period has been a time of shorter-term two-sided trading swings that have started with either 'overbought' or 'oversold' extremes in terms of hourly INDEX charts.

As highlighted on the daily Nasdaq Composite chart below, a well-defined trendline is one that's drawn through 3 or more points of intersection; 3 or more highs and this is the case of the SIX points that define COMP's down trendline to date. Contrast this with an up trendline that keeps getting re-drawn at lower levels as prices have ratcheted lower. The major indexes have yet to break under a prior downswing low, so maintain bullish potential.

Still the technical pattern is one of progressively lower rally highs, making the dominant chart pattern bearish.

Lastly, the hourly Nasdaq big-cap 100 stock index (NDX) is seen below. This chart is noteworthy in that there's a line of hourly highs that suggest substantial resistance in the 2660 area. This is another 'type' of trendline; a lateral one that is drawn through repeated highs (or lows).

These repeated tops also don't bode well for an upside breakout move. Of course this could happen still if there's bullish news relating to intentions of the Federal Reserve, which is what seems to be keeping this rally going in the near-term. This could of course happen, but I point again to the more likely retreat from yet another overbought RSI extreme in the RSI. Most likely outcome based on technical consideration in the near-term? Yet another pullback from recent highs.


GOOD TRADING SUCCESS!