The State of the Trend

By: George Krum | Mon, May 14, 2012
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Last week-end we observed that market internals are weakening. Two days later the SP500 registered its lowest low and found support just above the 1340 level. This happens to be the 23.6% retracement level of the October '11 - April '12 rally:

Chart courtesy of OT Fibonacci app

Trees don't grow up to the sky, and a period of consolidation after a prolonged rally is the healthy thing for the market to do. A retracement level of the current magnitude should not, by itself, be a reason for panic among long-term trend traders. 1340 also happens to be the retracement level of the last correction of the December '11 - April '12 upleg, and as long as the index doesn't break below that number, even the wave structure remains intact.

The decline last week, however, led to deterioration of the technical picture. Both the daily and weekly trends turned down, and the index remains below the pivot line at 1357, with first channel support at 1329 (as calculated by OddsTrader):

The ramifications are that in a downtrend traders should be selling rallies, while in an uptrend they should be buying pullbacks. What distinguishes the OddsTrader risk/reward oscillator (bottom of the chart above) from traditional oscillators is that it will remain oversold in an uptrend, and overbought in a downtrend, thus identifying opportunities to stay and trade with the trend.

This brief analysis wouldn't be complete without a look at the Trend Oscillator, which measures the deviation of price from the underlying trend. By that measure, the SPX price currently is in sync with the declining trend and hasn't reached oversold or overbought levels yet:

Chart courtesy of OT Trend

In summary, the SPX remains in a consolidation zone. A break above 1360 will open up the possibility for a run up to previous highs, while a break below 1340 will confirm the downtrend and put in play support levels at 1329, 1321 and 1315.



George Krum

Author: George Krum

George Krum

George Krum is the author of the "CIT Dates" blog, and the following apps:

OddsTrader - combines the power of Hurst Channels with proper risk and position size management. For a web version see OT Signals below.

Gann 9 - the only financial app that allows users to effortlessly apply the legendary W.D. Gann's tools and methods for trading (including the Square of 9).

OT Trend - helps you quantify and forecast the seemingly random ebb and flow of stock, index or mutual fund movement.

OT Fibonacci - automates the process of applying Fibonacci numbers, ratios and time series to any security.

OT Seasonal - allows you to perform seasonal analysis on practically any security from around the world, and to build long-term forecasts and models.

OT Pairs - pairs trading, one of the most successful hedge fund trading strategies, is now available on your smart phone.

OT Pivots - combines the power of pivot lines with cycles to provide you with concise technical analysis and powerful trading signals.

OT Signals - a web app accessible from any browser, tablet or pc. It gives buy/sell/hold ratings for any instrument from around the world, and defines the trend and support/resistance levels.

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