Market Retests Bottom Channel Intraday

Aug 18, 2008: 12:18 PM CST

As of noon today, the S&P and Dow Jones returned to test their rising daily trend channel (or possible rising wedge formation) and is finding temporary support at these levels currently.  Let’s look quickly and see what might be in store.

DIA Daily Chart:

Could a similar pattern be forming as what formed during March – May?  That pattern resolved sharply to the downside.  While it’s possible the same resolution could occur, I don’t think we’re there just yet and we need a little more time and information to see what the eventual breakout (and there will be a breakout one way or the other) will be.

Right now, the bottom portion of the trend channel comes in around $114.75 (Dow 11,475), which is – at the time of this writing – the intraday low so far.  Price is just a bit beneath the daily 20 period EMA, which registers at $115.10.  Notice also how the moving averages are sharply narrowing, and how price is being semi-contained between these two levels.  As a caveat, note also how price has recently failed to respect the daily 20 as support or resistance until a few sessions ago.

It’s as if traders have a squeeze on the index and both buyers and sellers are finding fair prices at these levels.  Big moves often originate out of low volatility or reduced range conditions, such as we’re having now (again, one need only to look back to May to see the last time price narrowed as such and the resulting trend impulse that occurred).

Let’s take a quick moment also to focus on the S&P 500 daily chart, which looks almost identical to that of the Dow.

S&P 500 Daily (zoomed in):

The pattern is the same – only the numbers have changed.

It’s important to note that the NASDAQ is not forming this pattern (in fact, is showing strong relative strength against the S&P and Dow) and the Russell 2000 is more in line with the NASDAQ.  It’s a battle of two markets (technically, four indexes), and it will be fascinating to see the resolution.

Let’s keep our attention here to see if we can gain additional clues, or if price will give us a definitive break one way or the other.  Until then, remain patient and try not to get frustrated.

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