First off, if you don’t understand trendlines, go read some basic technical analysis. This entry focuses on the importance of long-term tend lines.
The two snapshots of the Dow serve as key illustrations as to the self-fulfilling nature of trend lines.
Chartists and non-chartists look at trend lines. Period. Analysts who profess to be purely fundamental, if you gave them sodium pentathol, would admit to looking at long-term trend lines.
Far from black magic or mumbo jumbo formulas and complicated algorithms which some technical traders used to mesmerize their readers, trend lines are pure, clean, simple and relevant. Period.
The longer the trend line is from start to finish, the more significant it is. The more time the daily chart touches that trend line, the more significant it is. Which is a good segue into the following examination of these two charts.
First, is a chart of the Dow cash. A long term chart. Going back to the darkest days of the 2009 March lows at 6450. Fifteen months from start until today. The upper trend line has two good points, from March 09 low, with second point at our May “flash crash” low. Notice how the trade hovers around this point, as an if drawn to it magnetically?
Also notice how that line was tested multiple times. The final push through below that upper line brought us to our recent lows around 9600 at the beginning of July. That July 4th weekend was the one where EVERY article i read or heard about was bearish. Cramer put out the word not to buy stocks until we tested 9000… (Go back and read my entries around those lows).
We then, rallied off of that 9600 low and moved magically up to the 10400 level. What a coincidence that the high co-incided with what had once been our old support trend line.
Currently we are at a key point. Dueling Trend lines, if you will. The trend line drawn from the March 09 low to the early July low around 9600, looms below a rough estimate has the intersection to be close to the 9800 level, depending on which day you are looking for the potential intersection point. We could very easily flush down to that 9800 level. Very easily. Especially if its a low volume day and the pros can get their programs to run the tables to the down side.
Now for our second chart snap shot. ABOVE the market is a very significant resistance trend line. It is drawn from the recent multi month high in late April at the 11,200 level. Notice the multiple times this resistance trend line is tested?
Those multiple hits make it more significant, because it has been repeatedly tested.
As recently as TODAY, Wednesday July 21st, we traded up to that line, and then broke hard.
I did not see or hear one “analyst” on cnbc or msnbc or cnn mention this trend line.
Its more fun to shroud the movements of the market in some sort of Harry Potter-esque invisibility cloak..
So what is the point of this? Why should you as a trader, hedger, or speculator give two hoots about these trend lines? Because these lines give you opportunities to place entry or exit trades with one thing you need most… conviction.
If you are wrong, as a trader, you will control your losses and move one, however, making a decision at these key points gives you the intestinal fortitude to initiate a trade. Get short against the trend line, get long on a breakout above or below that trend line, but use the trend line to make a decision and initiate the trade. Period.
Looking at the chart with both the support and resistance trend lines in the Dow cash suggests that we are at a very critical moment in what had been a 15 month rally from our March 09 lows. Has the recent sideways to lower trade been a pause for the cause? Or are we really going to have another race to those lows at 9450 again?
The answer is….. NO ONE KNOWS…. However, the movement through these trend lines will be a catalyst which will give a nod to which direction we will accelerate towards once the market moves. And move it will.
A break below the 9800 level could spur another leg of panic selling. Absolutely.
A rally above the 10300 level, followed by a definitive settlement above the 10,600 level will ignite a rally which will take us back towards the late April Highs.
If we get a significant number of shorts going into such a rally, the rally could be explosive, as these losing shorts would be forced to chase the market higher, as their short-covering would move the market higher. The very act of them buying back their shorts will drive the market higher and will make that drive higher more violent. Like every one running for the exit in a fire at a movie theater.
My own personal opinion, for what its worth, is that we will rally. The level of negativity, hostility, disgust with not only the markets, but Washington, the recession, unemployment, housing values, etc. etc etc, has turned the public sour. Generally, the market will fade popular emotion. I think, we will climb the wall of worry. And each successive rally will be met by a rash of analysts on cable wringing their hands explaining why the rally shouldn’t be happening.
Obviously, however, I am not naive enough to realize that I may be wrong. If I am, so what? I will flip and get short after a significant move below that lower trend line.
Longer-term, we could still go back and test the major 50 percent retracement of the 15 month, almost 5000 point rally from the March 09 lows to the April 2010 highs at 11,200. 1/2 way back is 8,861… Lets just call it 8900…. Imagine that…
The key is, no matter if we break to 8900 or rally back to 11,200, the move will be telegraphed by where we trade when we test these trend lines…
Just look at the charts… They don’t lie, and they don’t have a bias. The charts are not left wing, right wing, pro- or anti- anything. They are the graphic representation of what is ACTUALLY going on in the markets,,, not what some pundit or politician is hoping for or predicting. As a trader/speculator/hedger keep your emotions out of it, watch the charts and make your moves accordingly.