Study of Market Charts

As part of my technical analysis for trading I take some time, at least once a week, to study the board market indexes. It's a known phenominon that an individual stock's direction is heavily influenced by the general market direction. Cliches like "a rising tide lifts all boats" are quite applicable. I've drawn some trend lines and key support and resistance in the following charts to help guide my eyes. This technical analysis is based on what I've learned from Teach Me To Trade as well as Technical Analysis of the Financial Markets by John J. Murphy. I'll attempt to identify the source as I explain what I've drawn in, etc...

On the right is my analysis of the S&P 500 10 days ago (August 11, 2006). I drew in the 3 ascending trendlines following the Fan pattern that Murphy describes in his book. Another idea that Murphy brings to light is 2/3 retrace. Simply stated: we can expect a 1/3 retrace from the low to the high, however if we fall through that we may find support at 1/2 way down from the peak, and after that 2/3 way down. What you'll notice on the S&P 500 over the last year matches this pattern pretty well. Notice that there's basically 150 points between the low in October to the high in early May. Interestingly enough, there's a bump at the halfway point on the retrace in mid May. After the market crashed through that level of support it retraced down almost exactly 100 points to find support 2/3 down from the peak to early-to-mid June. Take a really good look at the trendlines I've drawn in. They are initially drawn along the line of support on uptrends and resistance on downtrends, but notice how once the trendline (support) was violated it became resistance. This is especially true of the first trendline for both bottom (uptrend support) & top (downtrend resistance).

Because of this purely technical market analysis, two weeks ago I was expecting the bear market to be weakening and that we may soon see a bull market. At the time of the analysis (August 11) it was not exactly a certainty, and I honestly expected some consolidation before we actually see a true uptrend. However, it has lead me to favor my bulls watchlist for long positions that currently have a good setups, rather than continuing to be weighted towards the bearish side.

Here's an updated chart for the S&P 500 as of today. I've drawn in all the same forward-looking lines as was in the previous version, adding a couple new trendlines showing current market trend. These are not very well established, and because August's history as being a bad month (August Angst) a great number of people expect it to be the worst month of the year. The S&P 500 has managed to show some signs of predictability, but from a purely technical analysis, it's a time to be cautiously optimistic IMHO.

Below is a similar study of the Dow Jones Industrial Average. Notice how many of the same phenomina appear on the DJI as the S&P.

Please consider your source carefully when taking anyone's opinion about the outlook for the markets and/or stocks; after all, if you're taking my interpretation, allow me to remind you that I haven't even placed a trade with real money yet! I just wanted to let you see an example of how I'm looking at the market to help determine my positions. All of the above is only my interpretation & opinion, so be especially skeptical! I hope that in the future I can look back at this post and either 1) be proud of my decent interpretation or 2) laugh about how I could have such an outlook based on the charts because my technical analysis skills are so much better.

This post resembles a trading journal entry in many ways and it is part of my journaling activities. I'll give an example of my trading journal soon. As in music, the best person to learn from is yourself; it does require that you keep a certain detached, honest perspective in order for you to learn from your strengths & weaknesses. In music, the sound you produce is your ultimate goal and a mic is brutally honest and allows you a external perspective of how effective your efforts are. Listening to the playback with an impartial ear is one of the most effective self-teaching tools available. A trading journal is a way of capturing your thoughts, justifications, emotions, etc... at open and close of a trade. It gives you insight into your own trading strengths and weaknesses and thus is a learning tool that's custom tailored to you.