Triple Index Checkup Filling Out Trading Range

Mar 26, 2013: 5:15 PM CST

A quick intraday glance at the US Equity Indexes reveals a sideways consolidation pattern with clear range boundaries that form the structure for short-term traders.

Let’s take a look at the Dow Jones, SP500, and NASDAQ Indexes to highlight these patterns and whether the market may break through these levels in the near future.

First, the Dow Jones:

In simplest terms, when a market creates a “Trading Range” or Rectangle Consolidation pattern with well-defined boundaries, we look to three levels to guide our intraday trading:

  • Upper Resistance or “Expensive” Zone
  • Lower Support or “Cheap” Zone
  • Midpoint Value Area

In each chart you can see these reference boundaries defined by yellow highlights.

The main idea is that a market in a Rectangle pattern has found balance or relative equilibrium and traders can use the hand-drawn support/resistance levels as key references for what is perceived as fair-value, above fair value, and below fair value.

Keep in mind that these reference areas only apply to a market ‘bouncing’ between these levels; eventually a breakout will occur and redefine the levels, often with an impulse or trending movement beyond the upper or lower reference levels.

What we’ll be watching in the next few sessions is the interplay into the upper resistance line in these markets.

Specifically, we’ll be assessing real-time developments such as a gap above the level which could result in a breakout impulse or else a return lower from the current resistance which would first target the midpoint and then the Lower Support Line.

For the Dow Jones, the key focal level will be the 14,540 to 14,560 “Upper Resistance/Expensive” Zone.

A ‘failure’ or early reversal back under 14,540 puts 14,480 then 14,420 as short-term targets to play for on the intraday frames.

The picture is similar on the SP500 and NASDAQ, but with an interesting twist to know:

The  upper and lower reference areas are clear:  1,562/1,564 on the upside; 1,544/1,546 to the downside.

The Midpoint Value Area trades near 1,555 (an easy number to remember) but there’s one twist to the current structure that draws our attention.

While the Dow Jones has clear horizontal reference boundaries, both the NASDAQ and SP500 have a rising support line as shown by the small blue trendline:

In fact, the NASDAQ is better defined by a rising support or “cheap” reference level as opposed to the horizontal reference for the Dow Jones and SP500.

Still, the Midpoint Value Area is clearly defined – with multiple gaps and intraday reversals – into 3,240.

The main idea is to continue planning intraday set-ups within the context of these “Pattern” levels while price continues to trade (bounce) within them.

Eventually, price is likely to break through either the upper resistance or lower support, resulting in a potential swing-trading or multi-day impulse or trend move that can create intraday continuation trades.

While the Dow Jones – being at all time highs – has no known reference level above it, the SP500 continues to target 1,576 as the ‘spike’ high from 2007.

When trading intraday for the rest of the week, continue to reference these levels as long as the indexes remain in the pattern.

Look for potential bullish breakout/continuation trades if instead we see an early breakout that holds for the full morning session.

Beware of the potential for a vicious “Bull Trap” similar to what we saw on March 25th with the gap to new highs… which was not confirmed by internals.

Notice the violent return – collapse – to the lower support levels after the early morning failed gap/bull trap.

Always adapt to real-time developments, including potential traps.

Corey Rosenbloom, CMT
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