Despite today’s seemingly weak, boring and lack luster action, I thought it was extremely fascinating. You will understand what I am referring to once I post the chart of the sp500 below.
The day started out with a somewhat muted reaction to the jobs report. I knew that today was a critical day because any day that the sp500 is near or very close to a 3 year bear market resistance line, there are potentially very important implications for any big swings in price.
We started to get a minor sell off and I became a little bit fearful that the market was going to whipsaw my most recent BOT Long Signal. But the market was once again very reluctant to push down and by the end of the day ended up printing a higher low and higher high on the sp500.
During the early part of the day I was a bit concerned of the possibility that we may start to form a tri star doji pattern on the sp500. Even if today had formed a doji candlestick, it would still have been far from a perfect tri star doji pattern. It was not meant to be and by the end of day the doji morphed into a modest up close candlestick.
There was a comment in a previous post here at BestOnlineTrades.com that pointed out a possible diamond pattern on the DJIA by a German Analyst. I looked at that pattern and thought for a moment that he makes a very good point. But then I realized that there could also exist the possibility that this diamond pattern is simply a continuation pattern rather than a reversal pattern. I fail to see why he did not mention this in his interview. Still it is an important possible pattern and makes it especially important to observe the nature of price behavior at the current juncture.
Yesterday I also participated in an online webinar hosted by Metastock where I was very interested to hear the presenter talk about how the only thing he follows is price for his signals. He completely ignores all other indicators and oscillators. His sole decision making is based on price. He also said that price is a leading indicator, whereas oscillators and other typical indicators are lagging indicators. I think I already knew this fact, but it was refreshing to hear it out loud. The current trading juncture we are in now highlights the importance of this observation (that we must watch the behavior of price alone as a leading indicator).
The reason why I referred to the price action as extremely fascinating in the first paragraph of this post is because today the market tested and touched and rejected for the third time the 2007 three year bear market channel line. We rejected it after being above it, not while being under it. This is a very important distinction.
I don’t know how many of you use custom charting software such as metastock but I have to say that I believe that those that only rely on online charting programs may have some difficulty in seeing true precision of the top channel line since 2007 as I am able to see with metastock. Perhaps I am wrong and the same precision can be seen with online charting programs such as stockcharts.com etc. as it has been a long time since I have used stockcharts.com extensively or other online charting software.
My point is that right now precision is very important because it helps to define clear levels tested, broken or rejected.
Having said that, I must also realize that long term resistance lines can sometimes act as ZONES where they have some free play range. So even though I am making bullish comments about the current behavior of price above the long term 2007 resistance line, I am also a realist and must recognize that there still exists this ‘window’ of time when price rises above a resistance line where it must prove itself. Sometimes price trades slightly above a resistance channel for a little while but then becomes a failure breakout and falls rapidly back under the channel and into more bearish action.
Currently I do not see this as a near term possibility, but I am watching the tape closely in the current range.
Now onto the chart of the sp500:
It never ceases to amaze me how much detail and depth exists in a simple price chart. With every chart there is usually some kind of story going on.
The chart of the sp500 above shows the long term bear market 2007 3 year resistance channel line. It also shows that we are currently trading above this line now with four closes above it. You can see on the three most recent candlesticks we have traded down towards this line but then each time rejected it while being above it. This is significant in my opinion.
Four days ago a big ‘20/20 bar candlestick’ blasted us above this resistance channel line in a sign of strength.
Once can also see that we are currently trading above the 1150 level which is now support. We are trading above the 2007 resistance line which is turning (slowly) into a support line and we are also trading slightly above the up trend line in force since the 1st of September 2010.
So given all that evidence I have to conclude that the trend is still up and is likely to trend higher in the days ahead, perhaps in chop chop fashion, 3 steps forward and 2 steps backward. But again I am still not completely ruling out the possibility that this recent 4 day move is a fake breakout (because of the possible allowance of market action to trade in a zone of resistance instead of razor sharp resistance level). For now I view that as a remote possibility.
My preferred scenario is a slow and steady move back up towards the April 2010 highs. If and when that occurs it would be only natural to see a retracement from that level before moving higher.
But the big story today was again the market’s reluctance to dip lower and 3rd time rejection of the 2007 line.
I almost feel as if I have inside information while looking at this chart. That is how potentially powerful it looks to me. Traders really need to focus on this 2007 line, the uptrend since early September 2010 line and the 1150 line and the behavior around all of them. This is the most important perspective at hand now.
The red shaded area is clearly a ‘no go’ area for the market. In the unlikely scenario we go back in there, clearly I will have to change my outlook. But again, this looks like a remote occurrence at this point.
The McClellan oscillator ticked higher again today and appears to be confirming my current view. Also I noticed many key reversals and breakouts in some stocks on my watchlist today.
The BOT long signal is still in force and if the market continues to cooperate may stay so for quite some time.