The chart below shows the daily prices for the past year on SPY, an S&P 500 Index ETF, after the ETF closed the week at $206.44 on April 2, 2015.
SPY has maintained a wide ascending trading channel for the past year with only one multi-day break beneath its trend line of higher lows. The majority of the daily prices fall within the upper half of the trading channel, but this trend has weakened over the past four months and prices have spent more time hovering in the lower half lately.
A horizontal trend line has emerged close to $204 that has acted as both support and resistance multiple times since mid-November. This horizontal line and the ascending trend line of higher lows are on a path to converge in April and should offer support for stocks. If both of these trend lines break support, the next area traders will be watching is the shorter trend line of higher lows. Most of the touch points for the trend line are from December and January, but the line actually started in late May as resistance and then became support in June. The shorter trend line is currently close to $200, only about 2{01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6} below the expected point of convergence for the trend lines mentioned above.
Traders need to be aware of the signals from the moving averages and Williams {01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6}R before relying too heavily on the trend lines. In a rare occurrence, the 10, 20 and 50-day moving averages have converged at the same point, just below $207.50. Bulls should be cautious when this happens while SPY is trading below this point. Unless SPY moves above $207.50 within the next two trading days, the 10-day moving average will make a bear cross below the 20-day moving average and both moving averages will strengthen the bears’ case as they move below the 50-day moving average. On continued weakness, the influence from the moving averages will be enough to push SPY below its trend lines.
The Williams {01de1f41f0433b1b992b12aafb3b1fe281a5c9ee7cd5232385403e933e277ce6}R indicator offers another reason to be cautious. For the past year, in each break below the overbought area, SPY did not begin its recovery until at least the 14 and 28-day indicator bottomed deeply within the oversold area. Greater recoveries were seen when the 56-day indicator bottomed also. Since the latest break below overbought in early March, only the 14-day indicator reached an extreme level in the oversold area. The 28-day indicator touched oversold, but bounced immediately. The 56-day indicator has only made it to the halfway point, signally that the bears have not finished their turn at the reigns yet. Technicians will be in a wait-and-see mode until a clear direction is established again.
SOURCE: My Trader’s Journal – Read entire story here.
