SPY Forms Interesting Intraday Trend Channel May 19

May 19, 2010: 11:08 AM CST

It’s unusual when a major market ETF will form such a lengthy (intraday, that is) parallel trend channel that lasts a full day or more, but that’s what’s happening now in the SPY.

Let’s take a look and if you’re an intraday trader (of futures, options, leveraged ETFs, etc), it might be helpful to draw these simple trendlines on your charts and watch for an eventual breakout.

The @ES S&P 500 e-mini futures contract actually formed a perfect parallel trend channel, save a bull trap this morning.

Yesterday’s price action was contained almost entirely within the declining trend channel that you see above.

It’s a great lesson in why it’s far more important to understand market character/structure/behavior instead of trying to trade solely off of indicators.

Certain indicators work better in specific environments (Bollinger Bands and overbought/oversold oscillators tend to fail in a steady trend environment, like we see above, for example).

What tends to work well in environments like you see above are – surprise – simple trendlines and short-term moving averages (I’m showing the 20 EMA on the 5-min chart above).

The SPY trendlines slightly shifted this morning after the sharp sell-off from $112.50 to $111.00, so be ready to update trendlines as market momentum shifts, which changes trendline boundaries.

The futures contract trendlines remained solid from yesterday to this morning (I’m showing an extra hour of pre-market morning action in the futures contract which completes the trendline).

Keep trading within the boundaries until we get a breakout from the channel, which would suggest another change in market character.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

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