This hourly chart of Standard and Poors 500 stock index is a lovely example of a trend line trading setup. A typical kid-with-a-ruler trade. This chart was used in our techical analysis tutorials on how to draw trend lines >>> and for the example of trend trading >>> in the stock trading strategies section of this website.
We have a number of reasons for shorting the index here.....
* Trend line channels - you can clearly see the index is hitting the upper boundary of the redrawn price channel. This should give some resistance at least. (nb Traders Tip - On an exhaustive move, prices often overshoot or undershoot the trend line, this one has slightly overshot)
* Elliott wave count - We can count a clean 5 waves from the Feb 2010 low and we appear to be completing an ending diagonal for the 5th wave.
* Indicators - Technical indicators are showing a clear negative divergence with price and the RSI indicator has met resistance at the downward sloping trend line.
* Time studies - Our cycles analysis is indicating to us that a peak in stock prices is overdue.
What we expect to see happening from here is a clear reversal of trend. The first indication of this happening would be if the lower Blue channel trend line got broken and prices consolidated below that. Breaking the lower Red channel trend line is the important support level that bulls must defend.
A break up through the upper Red channel trend line is still possible in an overshoot phase but if that happens we would need to see prices reverse quite soon afterwards. A consolidation pattern holding above this line would have to be considered as a possible breakout so we would have to consider exiting the trade if we see signs of that happening.
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