Our expert, Jeffrey Tie, takes you through a step-by-step analysis of two S&P500 charts to see how you can make investment decisions by analysing trends from the market’s current resistance zone.
Technical View, S&P500 cash index. Image: Jeffery Tie
Here are two charts of the S&P500, side by side. The text is colour coded for easy reference to the charts.
The left side chart is a weekly candlestick chart on an exponential price scale. This chart has a long-term trend pattern (expressed by the green swing) representing the trend of the yearly time frame.
Close observation will show a long-term uptrend starting from the 1970s, interrupted by a sideway pattern that lasted from 2000 to 2013. The market then experienced a strong resurgence of buyers, and the long-term uptrend has continued to date.
The clear and unambiguous conclusion is that the trend is bullish, with higher highs and higher lows.
The question that we should ask is whether this uptrend is likely to continue, or likely to change, for this will determine our trading and investment strategy.
One way to answer this important question is to carefully observe what the market does at the current resistance zone.
Looking at the shorter-term red trend in the chart on the right, the red swing has halted at the Jan 2018 high (2872.87) and is potentially trading in a sideway range. The red swing is moving up, but has not displayed the uptrend pattern of higher highs and higher lows.
If the sideways pattern is to continue, then the red swing needs to trade between the support (red swing low of Feb 2018, 2532.69) and the potential resistance (red swing high of Jan 2018, 2872.87).
The sideway pattern can be valid even if the market trades above support or below resistance – as long as the attempt to break out fails, and the market returns to its sideway pattern.
If the market breaks significantly above 2872.87 (the Jan 2018 red swing high), then the red higher highs, higher lows pattern becomes a bullish red trend. This in turn will see the green upswing continuing higher.
A strong daily bearish candle accompanied by a strong bearish weekly candle, will suggest the sideway red continuation. If so, holding long positions near resistance will be painful for investors, as the market trades towards sideway support.
A strong daily bullish candle, accompanied by a strong weekly bullish candle closing significantly above the Jan 2018 resistance, suggests a bullish trend continuation on the green swing. If so, then it would not be wise to sell, as the long term green swing will be moving higher up.
Read Part II of the post (updated) here.
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About the Author
Jeffery Tie lectures on Trading for AB Maximus & Co. He was previously from Refco Singapore and CMC markets. He is also a registered instructor with the International Shinkendo Federation and previously wrote a 3-part article on the similarities between the philosophies of Martial Arts and Trading for Chartpoint Magazine.