Planning SP500 Market Structure to Start April

Apr 1, 2013: 11:56 AM CST

As we start April near all-time highs in the SP500, let’s take a quick look at pure price structure on three intraday frames and note key developments and levels in focus as a new month begins.

First, let’s view the larger short-term structure from the 30-min chart:

In simplest terms, structure refers to the progression of notable swing highs and swing lows price develops in a trend.

Uptrends are thus defined by higher swing highs and higher swing lows while downtrends develop lower swing highs and lower swing lows.

Structure forms the basis of technical analysis and refers to price itself – we add indicators to help guide our attention but at the core is the movement of the price and the patterns developed over time.

The larger structure continues to show a progressive uptrend that has developed a type of broadening trendline formation as seen above, and price has shown a tendency to ride the upper trendline as if pulled up by a magnet to successive new highs.

As we view lower frames, do keep in mind the “Open Air” to the downside and the recent recurring pattern of higher highs ‘riding’ under the top of the rising price trendline.

The 15-min chart shows the current boundaries clearly and these will guide our trading decisions:

Price has developed a lengthy sequence of higher highs and higher lows along with stronger swings (price movement) to the upside particularly through March 2013.

When assessing structure, we also study the distance of pro-trend and counter-trend swings (generally pro-trend ‘swings’ or impulses tend to travel greater price distances than counter-trend swings or retracements which tend to travel less price distance – this is part of what makes retracement trading attractive).

We’ll define the boundaries on the 5-min chart below, but I did want to highlight a key point regarding momentum which is a derivative of price (it’s used for confirmation/non-confirmation analysis).

Generally, strength (or a spike) in momentum serves as a confirmation signal that suggests additional pro-trend continuation or in this case that higher prices are likely yet to come (again, a basis for trading retracements).

However, divergences or non-confirmations in momentum relative to price serve as warning signs that suggest closing positions (taking profits) or – for very aggressive traders – playing a quick fade or scalp against the prevailing trend.

In terms of momentum, the oscillator clearly shows a loss of momentum in the form of a divergence (you can view it on the 30-min and 15-min charts) which suggests caution at a minimum.

Divergences tend to precede short-term reversals, but price itself must give the signal in the form of a break under dominant trendlines or prior swing lows, and that will be where we draw our focus in the days ahead.

Unless we see a clean breakdown under prior swing lows or the rising trendlines drawn above, despite divergences, swing structure does remain in an uptrend.

The 5-min chart highlights these short-term boundaries on which to focus our attention:

In simplest terms, the key short-term trendlines that define the current pro-trend structure exist into 1,557 and 1,571.

Another successful defense of the 1,555 to 1,557 trendline/rising support level by the buyers suggests that the pro-trend structure will continue with another rally to the 1,572 level or even the highly anticipated 1,576 “all time spike high” in the SP500.

On the other hand, a real-time clean breakdown under the 1,577, 1,555, then 1,553 levels begins to open the market to a potential reversal of short-term structure (a movement here would break a short-term trendline and the prior swing low from March 27).

For real-time trading, watch intraday developments (market internals, reversal patterns, divergences, volume) as price interacts with these key levels and incorporate these levels into your own analysis (and indicators you use – always start with price).

Follow along with daily commentary and detailed analysis each evening through joining our membership services (daily or weekly commentary, education, and analysis).

You may also join me during the the Morning Market Briefing with TradeStation Tuesday mornings at 9:00am EST and will be discussing this pattern and others in the live update (it is free to register and you do not have to be a TradeStation client to attend).

Corey Rosenbloom, CMT
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