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S & P - How To Find Potential Support. Locating Market Turns

Monday  8 February 2010

 One likes to have projected support/resistance areas ahead of time as
objectives for market moves for initiating trades and/or taking profits.  For
some time, the "Dubai low" loomed large as potential support, and in many
markets.  In the S&P, that potential support  was the 1062 area.  You can
see how the horizontal line from that late November low was extended into
the future as possible support.

 Price came close to it on 29 January, and the low end close looked like
price should continue down, but it did not, as will be seen in the next chart.

 

S&P D 1 8 Feb 10

 On 4 February, price reached that projected Dubai potential support low 
and closed low end on a wide range bar down.  These are all signs for
continuation down.  Next day, Friday the 5th, a report came out and the
market began to rally, after going lower.  We took profits at 1062, AFTER
a rally from the then new  lows.  About an hour and a half later, price gave
way and declined all the way down to the 1040 area. 
 
 As indicated on the chart, absolute price exceeded the potential support,
but note the close, just under that projected support and just under
Thursday's low.  This was after price rallied sharply off the lows, making an
impressive recovery.  It was only after we had covered and price declined
lower that we took a different look at where support might come in at lower
levels.

 As an aside, the last bar on the chart is pre-opening activity, and one can
see how the closes are forming a cluster, and a clustering of closes can
often be a turning point for a reversal in price direction.  We  already have
signs for a stopping point, so this just adds to the potential.  For clarity, a
stopping point is just that.  It arrests a price movement.  It does not mean
ending action, as in ending the downward trend.  It could turn into ending
action, but that does not appear to be the case, at this point.

S&P D 2 8 Feb 10

 Once price continued to sell-off, the question then becomes, how far can
it go?  We have drawn in a conventional trend line.  It does nothing to help
define a price objective to the downside.  We know that, so we added what
is known as a reverse trend line, a line parallel to it drawn from the
intervening low between the two points creating the trend line.  Next chart.

[The "close" on the last bar is just where price happens to be, as we write
pre-opening.  It is not an actual close.]

S&P D 3 8 Feb 10

 The Reverse Trend Line, [RTL], is drawn parallel to the trend line, and
the dotted portion projects the line into the future.  Price stopped just
about dead-on that line.  We need to point out that a RTL indicates an
oversold condition, and it does not mean to automatically act on it.  Over
sold, as we have said for ALL mechanical indicators, can become MORE
oversold, and price can easily trade under the RTL.  ALWAYS  defer to
present tense market activity.

 What made the RTL "active," as in holding the decline, comes from
identifying HOW price reacted to it.  [The then present tense market
activity.]  After the line was reached, the widest intra day range bar,
with the strongest volume was to the upside.  That kind of market activity
confirmed the validity of the potential  support, and it gave reason for
covering short positions, if they had not been previously covered.

 We pointed to the large volume for Friday's sell-off low and reaction rally. 
The large volume and almost unchanged close tells us that buyers came
into the market.  Most of the buyers were likely in the form of short
covering, but the volume suggests a mini-selling climax, capping a 107
point decline.  As was pointed out in Saturday's article, S & P - A Possible
Stopping Point Reached
, [click on http://bit.ly/anEIsu], we may see a
reaction rally, but we prefer to watch the character of the rally to determine
another selling point, or if the market may turn around for a longer duration
than 1-3 trading days.

 Right now, the 1100 area may prove formidable resistance.  HOW price
reacts to it, if reached, will give us important trading information.  Standing
aside, for now.  [Always subject to change.]

S&P D 4 8 Feb 10