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Tuesday, October 23, 2007

Is The Trend Changing?

There are some good comments from readers in response to Let The Charts Tell The Story. Specifically, double-top, candlestick pattern and trend change is being talked about.

One reader raised the possibility of double top in S&P 500. There is a possibility of this pattern forming, however, confirmation is required.
"Breaking support from the lowest point between the peaks completes the double top. This too should occur with an increase in volume and/or an accelerated descent"
In other words, we need to see a break of Aug low, accompanied by heavy volume to confirm this pattern.

Another reader talked about monitoring candlestick pattern before confirming trend change. Indeed, some candlestick patterns require confirmation, while others do not. Also if one finds confluence of candlestick pattern at some form of support or resistance level, then all the better! I would recommend Steve Nison's Japanese Candlestick Charting Techniques if you want to learn more about candlestick patterns. Last Wed and Thurs, the S&P 500 printed a spinning top and doji near the base on the uptrend channel. As we know, spinning tops and doji represent indecision. The bulls were basically fighting the bears to keep their territory after a few days of pulling back.

Then came the massive sell down on Fri. The bulls lost their footing. Short term up trend channel is broken. While this is a sell signal, does this means a change in trend? I would say no. Take a look at How to Identify a Change in Trend by Craig. In his post based on the book "Trader Vic - Methods of a Wall Street Master", there are 3 steps to confirming a trend change:
Step 1: The Trend Line Break
Step 2: Retest and Failure -stock fails to move above prior swing point high
Step 3: The Confirmation - stock moves below the prior swing point low
Essentially, we need to see lower high and lower low following the trend line break to confirm change in trend. Right now, we are at Step 1. We have to see how the index behaves as it approach the base on the channel. What is formerly a support will now act as resistance.

It is too early to say if we are at the start of bearish trend or this is just another blip. As a reader said, time will tell...


Blogger contrary canary said...

It sounds like you're saying there will only be a double top in the SPY if there's a double top. I don't mean to be argumentative, but I find the "double top" phenomenon to be rare and often a misleading term; there really are no double tops. There are tests of previous support/resistance points, rest periods, before breaking through those inflection points and coninuing on with the predominant trend. If you are saying that the larger bull market trend is over, then perhaps we would have a double top in the S&P. But I doubt that is true. I think the market is venting sideways until the moving average catches up, and then will proceed higher.

I do like your charts and technical analysis.

3:42 AM  
Blogger Simply Options Trader said...

Hi contrary canary,
Constructive comments are always welcome, no worries.

My post was in response to reader comment that there is possibility of double top forming. What I'm saying is its too early to tell because we need confirmation on this pattern.

I'm with you on the larger bull trend, at least up till year end. That is also why I'm telling readers not to be too quick to point to the bear trend until the technicals say so.

2:42 PM  

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