As a follow up to yesterday’s Chart School newsletter about the long-term Dow channel, http://www.themeshreport.com/2011/02/potential-stopping-point/, I just wanted to give readers a heads up as to what to watch for in case the stock market sell-off yesterday does turn into something bigger.
Please review the S&P 500 chart below with my notations:
The trend line I have drawn should be a formidable one. However, if we break it, I would think that if nothing else a correction would be in order. The Dow channel resistance area that I wrote about yesterday lies somewhere within a range of 12,400 and 12,700, but we could even go higher than that without actually breaking through it. Rather than try to pin a top on the channel, I’d look for the support line that I have drawn above to breakdown.
The Tale of the Tape: Yesterday I wrote about a very important channel resistance that has come into range on the Dow. It is difficult to say where the resistance line on the channel actually lies, but the point is simply that we are within its range. The first sign of trouble would be the break of the S&P trend line I have illustrated above. When that line eventually breaks, which it will at some point, we could be seeing a top of some importance in the market. Be cautious on long positions and look for shorting opportunities with stocks as well as the indices when this happens.
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. Capital preservation is always key!
Christian Tharp, CMT