Technical Analysis: Read This Before You Buy

| September 24, 2012 | 0 Comments

It’s been a little more than a week since Fed Chairman Bernanke revealed his plan for a third round of quantitative easing.  As expected, the S&P 500 jumped higher in the days following the announcement.

However, after the initial surge, the S&P 500 has done little more than tread water.  In fact, the large cap index finished the first full week after QE3 was announced modestly lower!

The stock market’s lackluster performance certainly caught some investors off guard.  But if you take a look at the chart of the S&P 500, you’ll see the recent price action isn’t all that unexpected.

SPDR S&P 500 (SPY)

As you can see, the SPDR S&P 500 (SPY) is in a strong uptrend off the June low.  It has set a series of higher highs and higher lows.

Put simply, this is a bullish continuation pattern.  It indicates the index should continue moving higher.

The green trend line connecting this series of higher lows is now a clearly defined area of support.  This is the point where traders anticipate buyers will step in and send the index higher.

You can also see a red channel line has emerged on the chart as well.  A channel line is a secondary line running parallel to the main trend line.  It indicates an area of resistance where traders anticipate sellers will step in.

As you might expect, the trend line and channel line together form the expected trading range for the S&P 500.

In this case, the post-QE3 rally sent the S&P up to the resistance from the channel line.  So, it’s not at all surprising to see the S&P’s rally fade after reaching this level.

Here’s the best part…

Last week’s lackluster performance hasn’t changed a thing.  The S&P’s still in a bullish upward trending channel. 

What’s more, the chart pattern is a great tool for timing new bullish trades.

Right now, the chart indicates SPY will continue moving higher in the weeks ahead.  But there’s no reason to get overly aggressive with new bullish bets.  Wait for it to test the green trend line before initiating any new bullish trades.

Pay attention to these important support and resistance lines and you’ll give your trades a better chance of working out in your favor.

Good Investing,

Corey Williams

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Category: Technical Analysis

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.