Mid-Week Index Views

Jul 4, 2007: 6:39 AM CST

Happy 4th of July!

The markets are setting up interesting swing patterns and are exhibiting both consolidation (which makes sense) and momentum divergences. Neither bulls nor bears are making significant headway in the last few weeks of trading, and little – except some shock – is likely move investors either way soon.

dow-july-3.jpg

The Russell and S&P look most similar (technically) to the Dow recently – all are showing range contraction and (buying) momentum divergences. The indexes are clearly carving out support and resistance zones and traders are becoming aware of these zones (which means they should break when everyone believes they are firmly established).

The only majorly individual chart is that of the Nasdaq, which is making new price highs despite the lag in the other major US indexes. This tends to be good news for the overall market because so much of the Nasdaq is in ‘volatile’ technology stocks. Observe:

nas-july-3.jpg

I also could not resist pointing out that we are upon a so-called “Bollinger Band Fade Trade” or for those with a little Irish leaning, it’s a “Top ‘O the Bollinger” Fade Trade. It goes without saying that the expected play occurs when price is exhibiting rangebound characteristics and reaches the upper Bollinger Band (20 period look-back at 2 standard deviations). This would indicate a possible 90% chance of price returning to the mean (20 period moving average) soon. A corresponding stop would be placed a safe distance (you decide how close) above the upper Bollinger Band in the low-probability event price continues through it.

Three of these such trade setups have worked since May in the Nasdaq (QQQQ for the ETF).

Also, take the ‘low volume’ rise in stride, meaning this is a holiday week and thus does not constitute a technical analysis volume deterioration signal. Overlook this reading for now.

Enjoy the holiday, be safe, and come back refreshed!

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