As the markets rallied on Friday, I was curious as to why the markets seemed to stall all day at or near the high. Why not sell-off? Why not rally higher? I decided to analyze a few charts to see if there might have been a reason. Well, I found 3 or 4 good reasons why the market may have stalled.
Let’s take it one chart at a time. First, please take a look at the 1-year chart of the S&P that I have shown below. You will also notice my notations.
As the S&P has moved higher, it appears to be trending within a common price pattern known as an up trending channel. The S&P seems to be struggling at the top end of this channel. When it comes to trend lines/channels, my view is that (2) connected points create the trend line, but a 3rd confirms it. So, we’ll have to see how this plays out as the markets continue higher.
In addition, the same 1150 area of resistance created by the channel now also acted as resistance back in January. This area could be a tough nut to crack in the short term.
So, let’s move on to chart #2!
The chart above is a 5-year chart of the S&P. I have added a down trending resistance line that connects the 2007 bull market high with what may end up being the April bull market high of the 2009-2010 rally. If you believe in the secular bear market returning, then that April high could prove very important. Although the S&P hasn’t actually made it to this trend line, it sure is getting close. Will the 3rd hit confirm it?
And one last chart:
Although I usually pay more attention to the S&P over other indices, I do tend to keep tabs on the NYSE Composite. It never hurts to know what all stocks combined on the NYSE Exchange are doing. Some traders actually prefer this index for their market analysis rather than the S&P or even the Dow. You will notice that the NYSE Composite also hit what appears to be an up trending resistance. Also, is there the possible formation of a bearish wedge pattern on the NYSE? It could be a little premature, but definitely something to keep an eye on.
The Tale of the Tape: The S&P seems to have created a channel pattern to watch. The 1150 level of resistance is also a familiar resistance level, which also happens to be where the top end of the channel’s resistance lies too. A longer term S&P resistance line is coming into play as well. The NYSE also seems to be at the top end of a resistance line. These areas may prove to be difficult levels to get through, at least in the short term, especially after such a great September run.
Watch for pullbacks to the support levels I’ve highlighted above, especially if the S&P falls back below the key 1130 level that was referenced in a previous Chart School newsletter. These supports could provide ideal entry points. The resistances I’ve outlined will also give you a heads up for stop loss management. Breakouts or breakdowns of the levels above will provide entry points for either additional longs or new shorts.
Waiting for the most opportune times that I have outlined above could provide you with higher probability entry points. No matter what your strategy or when you decide to enter, always remember to use protective stops and you’ll be around for the next trade.
Christian Tharp, CMT