Strong continuation on good volume today. The Emini closed up 11.75 points at 1,370.75 on Thursday. The bounce off the rising trend line we saw on Wednesday continued today with good volume, large range and closing on the highs. How much further will the rally go?

Trend Lines Continuation

Trend line bounce showed the way

Today was a typical “range” day. The market opened at yesterday's high, sold off less than 1 point then rallied strongly on good volume and closed within 1.25 points of the high. All of this comes from yesterday's bounce off the rising trend line.

This rising trend line now has four touch points and makes it a very significant one. The touch point lows were made on 11 September, 22 September, 3 October and 11 October. This will be an important trend line to help identify short entry points going forward, so we will watch it closely.

With Goldilocks market volume

The chart above shows yesterday's volume of over 1.3 million contracts and today's volume of 1.0 million contracts. Today’s volume is very close to the market average but nicely higher than the contraction down to 0.5 million contracts on 9 October. You could call this "Goldilocks" volume – as it is neither too much nor too little – and points towards a continuation of the uptrend.

There's not much more to report today. Low crude oil prices continue to support the market and although bond prices have crashed in recent days, there is typically a delay between the bond market and the equity market of around 20 days. So there is still some time before the equity market should react. Although the market appears overextended, valuation is not pointing to a change in trend just yet.

No signs of exhaustion yet

For an uptrend to finally stop, we need to see signs of market exhaustion. Typically, I look for:

• Excessive Trading Index (TRIN) values
• Divergences between the Dow and NASDAQ
• Ultra high or low volume readings, and
• Panicky market openings (Larry Williams Oops patterns, etc.)

As yet, we haven't seen any of these in the latest rally over the last couple of days and so I expect the rally to continue.

Good luck with your Emini trading

Downside break and trend line bounce today. The Emini closed down 1.75 points at 1,359.00 on Wednesday. We got the downside break expected after yesterday's analysis. Then the Emini bounced off a rising trend line on large volume in the afternoon. Will the rally continue?

Trend Lines

Leave the trend lines to the computer

In a previous post, I talked about how subjective drawing trend lines can be. As usual, my answer is to get the computer to do the hard work. The trend lines shown on the chart above have all been drawn automatically.

First, pivot points with a strength of 4 (i.e. higher or lower than the four bars on either side) are identified and plotted as red and green dots on the daily bars. Then trend lines connecting these points are automatically added.

Rising trend lines are colored green and falling trend lines colored red. In addition, I also color the daily bars based on the trend line direction – red for up and green for down. Market indecision is shown with white daily bars.

Oops pattern again

The market opened below yesterday's low and then immediately rallied past it. This is a classic Larry Williams Oops pattern, usually indicating that non-professionals have panicked and allowed the professionals to take advantage and start buying. The market continued to rally until it hit resistance around 1,362.50 – close to the highs made over the last four days. The Emini then fell sharply to 1,351.

Then a trend line bounce on high volume

This level coincided almost exactly with a significant rising trend line joining the lows made on 11 September, 22 September and 3 October. The more touch points, the more significant a trend line is. At this point the Emini rallied strongly on high volume to close at 1,359.00 – all during the last hour of trade.

The market is now range bound with the upper resistance level at 1,363 and the lower support level at 1,351. We are likely to see another test of this resistance level, since were are only 4 points away. However, we'll have to wait and see whether there is enough volume to push the market significantly higher or whether it will run out of steam again.

Good luck with your Emini trading.

Trend lines bounce today. The Emini closed up at 1,343.25 on Tuesday. The market gapped down at the open, continued lower and then bounced off a rising trend line. Keep reading this article to see how I plot trend lines and use them to gauge the mood of the market.

Trend Lines

No one agrees when it comes to plotting trend lines

Drawing trend lines can be very subjective. If you asked a dozen market analysts to draw trend lines on a chart, you would probably get a dozen different answers. The most rigorous approach to drawing trend lines that I’ve seen is in Tom DeMark’s book “The New Science of Technical Analysis.” His approach is to identify the most recent significant pivot point and then draw the trend line backwards. This works well and is easy to use. However, I do object to Tom thinking he can trademark this idea and call it TD Lines!

Let your computer do the hard work

Most market commentaries I've read have hand-drawn trend lines. I prefer to take a different approach to drawing trend lines and let the computer do the thinking for me. The trend lines on the chart above have all been drawn automatically. First, pivot points with a strength of 4 (i.e. higher or lower than the 4 bars on either side) are identified and plotted as red and green dots on the daily bars. Then trend lines connecting these points are then automatically added.

Rising trend lines are colored green and falling trend lines colored red. In addition, I also color the daily bars based on the trend line direction; red for up and green for down. Market indecision is shown with white daily bars. (note: sorry if that coloring convention seems confusing, maybe I’ll change it someday)

Trend lines can be quite significant, however …

The chart above shows an up trending market with today’s low touching the trend line that connects the last two pivot points. It always surprises me how precisely the market can react to these trend lines – sometimes bouncing off them almost exactly, as we saw today.

In my own trading I like to watch these trend lines to see breaks and bounces. However, I rarely use them to make decisions about entry or exit points. I prefer to use indicators of “smart money” activity and exhaustion points.

Good luck with your Emini trading.