Thursday 12 October 2006

Trend Line Continuation

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 Line Volume Image

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. 

Do a Google search for market exhaustion to find out more.

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