STOCK MARKET FOR BEGINNER | Stock & Option Guide

20-DAY PRICE CHANNELS… Here’s a simple trading tool that you might want to incorporate into your work. It’s called the “Price Channel” and you’ll find it under the Overlays list below moving averages and Bollinger bands. One of the most popular versions of the tool is the 20-day channel which is derived from the “four week rule” that I wrote about in my first book twenty years ago (invented by Richard Donchian, a legendary commodity trader). By choosing the number 20, price channels are placed above and below the current price based on the highest and lowest prices reached over the prior 20 trading days as shown in Chart 1. When prices hit the upper band (blue circle in mid-March), that means that prices have hit a 20-day (four week) high and a short-term buy signal is given. In its original version, that short-term long position would be held until the lower channel is hit (a 20-day low). Stockcharts, however, offers a closer stopout point which is the middle dotted line that is located midway between the outer channel lines. You can liquidate your long position when that middle line is broken (blue arrow). The red circle shows a short sale signalled in mid-January which lasted until March. The system isn’t perfect however. A short-term buy signal was given in early January which proved untimely. Fortunately, a quick break of the middle line within a week terminated that trade with a small loss. At the moment, the short-term trend of the S&P 500 is still up. A close below the middle line at 878 is needed to take some profits. The 20-day channel is a short-term trading system. You can vary the channel number to make it longer-term (more days) or shorter-term (less days). The four-week rule (or some variation ) can be used in all markets. Since it’s a trend-following system, it works best in trending markets and less well in a trading range. Intermediate and long-term buy and sell signals can be got by using 10- or 40- week channels and can be tied to the direction of those moving averages. That has special significance for the 200-day (40-week) moving average which is still falling (Chart 2). A bull market normally requires that prices exceed that line and that the line itself turns up. A 40-week channel tells us how far prices have to rise for that to happen. I’ll explain how to do that later in the week. In the meantime, Chart 2 shows the S&P 500 remaining below its falling 200-day moving average.

Chart 1

Chart 2

 

 

[By John Murphy]

The S&P500 Index closed below 866 last week. This represents a fall of 3 points (0.4%) off the previous week’s close. Last week fall marked the end of 6 consecutive weeks up since 2 years ago.

The market took a beating on Monday due to news of impending credit losses that might further implicate the dire state of big financial institutions. The market managed to rally back the losses after Monday for the rest of the week. Last Friday, the market pushed for a higher close for the week but in the end the market decided to close the week flat to the downside.

The market price action still looking positive as the buying sentiment of last hour is still ongoing even though the market is in a very choppy and volatile environment. Fund managers and Institutional managers are slowly buying on every dip of the market in fear of losing out another leg of gains that might happen in a few months.

Looking at weekly candles, the S&P500 Index suggests a pause to the upside for the week. Last week’s candle was a formation of a hammer in a rising trend. A hammer in a rising trend usually signal a sideways trend for a period of time.

Looking at daily candles, the S&P500 Index looks like it will follow the same pattern as the previous week with profit taking on either Monday or Tuesday. The market is likely to test the 875 level with the 825 support level to hold. This means that the market should trade in the range of 825 to 875 level.

The immediate support levels now are S1: 850, S2: 825 and S3: 800.
The immediate resistance levels are R1: 875, R2: 900 and R3: 925.

The Dow Jones Industrial Average has been hovering around the 8000 level since the beginning of April. It has been trading at that level for the past three weeks. This suggests that the S&P500 is likely to follow suit as the market will consolidate for a few weeks and gather its strength to break the immediate resistance level to achieve a gain for the year.

The Dollar Index (DXY) has dropped from 85.6 to 84.7 last week on weekly candles. The dollar index continues to trade in the range of 84 to 86 levels for the past few weeks. It is likely to stabilize at this current level for the next few weeks. Gold has been surging for the last week to break above the 900 levels. This might mean that investors have been looking for an alternative place to park their money other than the equity market. Oil remains above the 50 levels for last week.

In summary, this coming week should experience a mild rally as the market seeks clarity. The market is likely to debate on whether the correction is justifiable. The market will also be watching the flu virus in the country.