In his guest post earlier today, Adam showed you a video forecasting a reversal in the S&P 500 using Marketclub Trade Triangles. I wanted to follow up his video using more traditional indicators to show you not only how accurate the triangles are, but how much easier they are to utilize as a trend following indicator. If you haven’t watched the video, take the time to watch it now (affiliate link) as it will give you a better perspective on my analysis!
Drawing Trendlines and Determing Trend
Below is a 1 year daily chart. I always begin my analysis by removing all indicators from the chart and drawing in long term trend lines. The key points I see in this chart are:
- The market has been in a clear uptrend
- The bottom of the ascending channel has broken twice
- An Ascending Wedge Pattern has formed
- There is notable sideways action that hasn’t occurred during this ascending channel
Check Fibonacci Retracements for Support / Resistance and Targets
This is a 3 year weekly chart with fibonnaci retracements drawn in from the highs set in late 2007. As you can see the current market rally has stalled at the 50% level. The 50% fibonacci retracement level is often referred to as “thin air.” Think of the market rally as a novice mountaineer. As he climbs the mountain the air gets thin. He begins to slow down, and eventually can not continue any higher. Our mountaineer descends down the mountain to base camp to catch his breath. When he’s ready, he’ll try to get further than the last time, and, if his lungs are ready, he’ll succeed.
This is exactly what’s happening in this market. It has reached the “wall” at 50% and is trying to head higher, but the markets “lungs” can’t catch a breath. This is marked by the notable sideways action we’re seeing.
Don’t Trust Fibonacci? Check Momentum!
There is a HUGE divergence between momentum and price on the 12,26 and 19,39 MACD, as well as the 3-10 oscillator. On Balance True Range is also looking very top heavy.
We’re Headed Lower, A Clear Indicator…
Below is the same 3 year weekly chart, and the important indicator to look at is the 19,39 MACD. I use this implementation of the MACD for sell signals. At no point in the rally, until now, has this indicator showed any signs of a sell signal. It’s looking awfully top heavy as well.
Now Isn’t This Easier?
With Marketclub Trade Triangles (affiliate link), all you need is one chart. Exit long positions when the monthly triangle is green and the weekly turns red. If the monthly turns red, time to get short!
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