Let’s Get Technical

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The market has had a couple good days. Weekly options are expiring today. Major economic events are happening next week. How will investors be thinking today? We can try to divine their thoughts by looking at their actions as reflected in the movement of broad market indexes such as SPX, which tracks with the S&P 500. Here’s a chart of its price action over the last 6 months aggregated into one-day candles.

We’ve seen an uptick on the last two days. Technical traders would recognize the green candle on Wednesday as forming a CAHOLD pattern, meaning that the close on Wednesday was higher than the close of the previous low day, which would be taken as a bullish pattern. That bullishness seems to have been confirmed in Thursday’s trading.

I’ve drawn two horizontal lines on the chart to indicate levels of support and resistance. These lines identify areas where price changes seem to hang up. The line above the current price is a level of resistance, the lower line is a level of support. As price changes, these lines can represent either support or resistance, suggesting areas where the price might linger. Use your own eye to draw a horizontal line based on yesterday’s close. Do you see a vague area where prices tend to pivot up or down? If so, maybe you’ve identified a secondary area of support/resistance. So what can we expect today?

We may get some clarity today when the market opens and we see price breaking up or down. As I write this about half an hour before the market opens, the S&P futures are up around almost a full percent, suggesting prices may break upward. But remember that overnight trading is light, and often it fails to forecast what will happen during normal trading hours. If the market continues its upward momentum, it is likely to stall a bit below the 4100 level, which is marked by the upper horizontal line. If upward momentum reverses, SPX will likely pause in its downward trend around the 3900 level. Give some thought to how these insights might help determine the desired parameters of an option trade today.

I’ll update this post later today.

The market opened 15 minutes ago and SPX gapped up at open and kept rising, going above the secondary resistance level we noted above. Traders may attend to the emerging three day reversal of SPX’s decline over the last three weeks and view it through the lens of Fibonacci retracement. The chart below focuses on the last six weeks of our SPX chart and adds Fibonacci based lines of support and resisance to it. Notice that the 38.2% Fibonacci line resides in an area that we previously identified as one of “vague support/resistance.”

Traders who buy into a Fibonacci analysis and are less committed to the bullishness shown this week, may begin selling as price approaches the 38.2% Fibonacci line, which would cause the price rise to pause. More bullish traders may provide more energy to propel the price to higher levels of resistance. For now, it appears unlikely that the SPX will close below Wednesday’s high. We’ll see.

It’s four o’clock and normal trading hours are ending SPX is at 4067, almost midway between the two estimates we made this morning regarding the level of resistance we thought we might see. See the chart below. Was our forecast the result of luck or skill? We don’t know that, but we do know this: it was the result of a defined process that is repeatable by us or by anyone else who has read this post. The scientific method is based not only on empirical data, but also on replicability of the process used to test our hypothesis.

Key take-away: Areas of price support and resistance suggest what traders may do, but there is no guarantee that they will always forecast correctly.