I took a slightly different tack in my last Trader's Corner
article, which is to see what each week's developments in the major stock indexes and/or in selected stocks, brings up in terms of it being a 'lesson' or an aspect of analyzing ongoing/unfolding technical developments.
I've written many prior article on 'major' aspects of chart/trend analysis (e.g., various Top or Bottom patterns, trendlines, Indicators, etc.) that I can LINK to from our Archives when a pattern relevant to the trend or a possible significant trend change. Small bore aspects of charts and indicators come up weekly that are a consistent influence in my life as a trader, but which I don't always take the time to highlight in this space from week to week. Details matter in projecting where prices are going, when they've gotten there and when the trend is shifting or just stalled.
My shift in emphasis is to write more about the week to week things I see in the charts that are short and to the point and that can be perused QUICKLY. I've been realizing more and more myself that I don't have the time to read all the details of all the stories of possible interest. Just a short summary of the facts please! Why I always liked those WSJ summaries of that day's articles. Of course, e-mailed questions or comments are welcome and can be featured in my Trader's Corner.
SEEN THIS WEEK IN MY CHARTS:
(1) SIDEWAYS moves in an overbought market starts 'throwing off' an overbought extreme, taking on a kind of pressure release function. It may take a while before prices actually DIP much. In bullish trends at pause points or interim tops, prices tend to first go sideways and later, sometimes quite a bit later, prices fall, often sharply. (2) Support, once pierced, tends to 'become' resistance later on as is true of resistance becoming later support per my final chart.
The S&P 500 (SPX) hourly chart seen first demonstrates both the aforementioned 'principles' or technical aspects described.
SPX has trended basically sideways on an hourly chart basis recently, although within the context of a minor Head & Shoulder's (H&S) top pattern. The sideways trend evident on the hourly chart has been accompanied by a steady decline in the 21-hour Relative Strength Index or RSI as highlighted below. This has relieved or 'thrown off' the short-term overbought conditions in SPX. This is in the nature of the RSI formula, a ratio of up versus down closes for X trading periods; X equaling the 'length' setting that you put in.
(2) The so-called 'neckline' of the H&S pattern is a trendline that first highlighted support at 'S' and the green up arrow. After the (neckline) trendline was pierced, the subsequent rebound found resistance at what was had previously been a line of support. Support or in this case, a support trendline, once pierced had 'become' subsequent resistance at 'R' at the red down arrow. This pattern is a very common development in trends and we see this pattern of 'opposites' at the lower line of Resistance around 1280 that, once penetrated, became later support.
We see the same principle of a pressure release nature so to speak on the Dow 30 (INDU) daily chart. As INDU has trended sideways over the past 8 trading sessions, the 13-day RSI has started falling. It doesn't take an actual fall in prices or by much, to cause the RSI to come off its overbought extreme. I anticipate a sharper dip to come but if prices ONLY kept going sideways, the RSI would wind up at a 'neutral' mid-range reading or even dip to its oversold zone again.
What this pattern, this dynamic, tends to suggest is that more of what I call a 'time' correction is occurring or occurring first. A sideways time correction as opposed to a significant price correction; e.g., where prices retrace a third to a half of the prior run up. Such a sideways move IN OR AFTER an overbought extreme can suck in bullish traders who see the sideways trend as yet another consolidation of the up trend. However, the TRENDLINE BREAK seen below suggests that momentum has shifted and is quite different than the prior sideways moves occurring before prices again headed higher.
To bring in a stock chart example, Apple (AAPL) provides numerous examples of how a prior line of resistance (at $360), once penetrated, 'became' the low point (support) of several AAPL dips back to the same area.
The stock could have been bought on 3 instances for $40-60 gains by having confidence in knowing that the 360 area was a likely strong area of support. Along with this confidence was the confidence that buying in this price area ALSO meant that your EXIT point on the trade didn't have to be very far under this price entry. If support was true, your exit/stop point wouldn't get triggered. Reward potential was excellent relative to dollars risked assuming adherence to a 'tight' stop; e.g., risking $7-8 from entry around 360.
GOOD TRADING SUCCESS!