Why the Next Swing will be Important to Determine Market Structure

Oct 16, 2012: 3:55 PM CST

What is the current “Market Structure” and why will the next swing be so important to determine the trend structure for the “Big 3″ US Stock Market Indexes?

Let’s take a look at core market structure and what the next price swing will reveal with regard to a bearish reversal or bullish trend continuation.

Here’s the current S&P 500 (hourly chart):

We’ll see the Dow Jones and NASDAQ shortly but let’s review what the term “Market” or “Price Trend Structure” means and how it is applied.

At the basic form, trends are comprised of a series of swing highs and swing lows in time.

An uptrend is comprised of a sequence of higher price highs with higher price lows and the “upswings” tend to cover more price distance (point-wise) than down-swings (counter-swings or retracements).

The same logic applies to a downtrend.

A downtrend reverses structure into an uptrend when price…

A)  Forms a first higher high then retraces to a first lower high and then TRADES ABOVE the most recent high
B)  Forms a new higher low, pushes to a higher high, retraces to another higher low, and then TRADES ABOVE the new high

We can see this first (typical) progression develop through June 2012 with the classic higher high and higher low.

In early July price broke the 1,360 high on a burst of momentum to reverse the intraday (short-term) trend to a bullish trend that has continued to this day.

However, the current upward structure is in danger of reversing, and the very next swing in price will reveal whether the trend has officially reversed… or else moved as far as the definition can stretch to still maintain its uptrend status.

It’s important because October revealed a very slight lower high (1,474 vs. 1,471) which then gave-way to a very slight new lower low (1,430 vs. 1,425).

That doesn’t reverse the trend, but a new move under 1,425/1,420 will reverse the structural uptrend in motion.

Otherwise, a continuation of the power-rally we saw over the last two days that carries price back above 1,475 will continue the bullish structure after pushing to the edge of the definitional cliff of “uptrend.”

It matters because a continuation higher suggests that the next upside target extends to 1,500 and higher, while a breakdown under 1,425 immediately targets 1,400 and lower.

In fact, a structural reversal here likely targets even lower levels (see the lengthy negative momentum divergence).

The picture of structure is the same in the Dow Jones and NASDAQ indexes:

While the structure is similar, we see a slight relative strength in the Dow Jones as the most recent swing highs were almost identical (13,653 vs. 13,651).

The levels to watch in the Dow Jones will be 13,296 (breaks to a downtrend) and of course 1,3653 (continues the uptrend in place).

Of the “Big Three” Indexes, the NASDAQ shows relative weakness because the most recent swing points were visually lower than the S&P and Dow Jones counterparts.

We’re keeping our eye on 3,037 on the downside and 3,171 then 3,196 on the upside.

Once you assess Market Structure (uptrend, downtrend, reversal), you can then apply other analysis for targeting and trade development.

For many traders, it’s far easier to trade WITH a structural trend in motion than against it (constantly playing ‘fade’ trades or reversal trades).

Watch these levels for signs of official reversal or continuation.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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  • Smartesse

    The artificial upward momentum of the past few months is unsustainable.

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