Support Confluence

Apr 28, 2008: 10:44 PM CST

There’s an interesting confluence of support coming in on the Dow Jones and S&P 500 Averages.  Let’s look:

S&P 500:

On both charts, three proposed trendlines have all come together to a point, which sits just under the current index prices.

It’s interesting to have such a confluence.  Also, the key 20 and 50 period moving averages also have set-up just beneath the price which could also provide key support to price.  The 20 period has recently crossed above the 50 (which is bullish).

It’s just an observation, but it would fascinate me to see price shatter all these support levels.

Recall that price is still in somewhat of a downtrend, and is still beneath its key 200 day moving average, which is bearish.

The S&P needs to clear 1,400 and the Dow needs to clear 13,000.  If bulls take these levels out, we could have a retest of the prior swing highs.

Failure at these levels will push price down to retest the prior lows, and could even precede further.

It may be better to wait until a move is underway before joining, rather than trying to anticipate which direction you think it will break.

The Fed’s upcoming decision could be enough to propel the indexes out of this range and into a direction with conviction.  Until then, be safe!

2 Comments

2 Responses to “Support Confluence”

  1. Michael Says:

    Corey,

    How do you determine where your trendlines are drawn? Based on how I learned (from Trader Vic – http://tradermike.net/2006/01/drawing_trendlines/) trendlines shouldn’t cross through other bars. So, for example, the March uptrend would connect with the mid-April intraday low instead of going right over it as in your chart.

  2. Corey Rosenbloom Says:

    Hey Mike,

    Trendline analysis, like moving average selection, is very subjective, and there are trade-offs with any decision.

    When connecting, I’m ok with not using the wicks (intraday movement) for candlestick charts, because I feel the close is more important.

    I try to connect as many closes/points as possible, and account for times when a close may have gone beyond a trendline – it’s still just a zone of support/resistance.

    Trendlines become more valid with the more ‘touches,’ so if you have to sacrifice a few closes outside the line in favor of capturing more price touches, I’m ok with that, but I realize the sacrifice I make and that it might skew or distort the analysis.

    In this case, the reason I chose to exclude the April low (in both charts) was because I was able to pick up the recent three days of closes closer to that line and also capture the early April low (I should have moved it up just a little in that case).

    The middle trendline in the S&P 500 should have a slight downward slant so as to touch more points, but the Dow’s is more flat/horizontal.

    I’m ok with the downward sloping line in both charts as it has held and been tested frequently.

    It’s that bottom one that I compromised on. Choosing to incorporate the April lows would put the S&P trendline terminating at 1,375, which would look more like a larger triangle consolidation, but still would be beneath the price now (it just wouldn’t be as close).

    It will be interesting to see which way the market breaks after the Fed!

    Thank you for the comment.