Working Money magazine.  The investors' magazine.
Traders.com Advantage

INDICATORS LIST


LIST OF TOPICS





Article Archive | Search | Subscribe/Renew | Login | Free Trial | Forgot ID?


PRINT THIS ARTICLE

THE DIAMOND


S&P 500: Diamond Up or Down?

10/03/02 11:55:38 AM
by David Penn

Starting October with a rally, the S&P 500's next move may be on the other end of a diamond.

Security:   $SPX
Position:   N/A

For someone who views week to week changes of four percent or more as strong indication of price momentum, the recent, one-day 4% surge upward in the S&P 500 was an attention-grabber. It was also an excellent example of how important context can be.

The up-day of October 2, 2002 appears to trace out the second half of a diamond formation. The diamond formation can be both a continuation as well as a reversal pattern, and is formed by two sets of parallel trendlines--as shown in the chart of the S&P 500 presented here. Because prices can break from a diamond in either direction, it is usually advised to wait for prices to penetrate beyond one of the right-side trendlines before taking a position--long or short.

Figure 1: A diamond pattern emerges at the end of this downtrend in the S&P 500.
Graphic provided by: Prophet.net.
 
The size of the formation tends to determine the length of the breakout's initial move. The six-day diamond forming in the S&P 500 has a high of 860 and an intraday low of 800, providing for a formation size of 60 points. Adding this amount to an upside breakout point of about 840 gives an upside target of 900--setting up a test of the September highs (such as they were). A downside breakout point of 820, on the other hand, would suggest a downside target of 760, which would likely represent a test of the July lows.

There is an important caveat about diamonds. Diamond patterns are as prone to false breakouts as any number of other chart patterns. A look at the December Japanese yen futures contract is instructive in this regard. The December yen was breaking down from a triangle top (see my "Forex Triangle Tops," Traders.com Advantage, 9/10/02) when it began a sharp, flag-like counter move to the upside. After gapping down sharply against this trend (resuming the downtrend from the triangle top), December yen began moving up again.


Figure 2: This diamond in December Japanese yen futures initially broke to the upside.
Graphic provided by TradeStation

This movement appears to have traced out a diamond pattern. December yen initially gapped up and out of the pattern in late September. But more recently, December yen has been moving back down. This combination of events suggests a false break to the upside, with a resumption of the down trend following shortly thereafter. Thus, one rule of thumb with diamonds--that the top and bottom of the formation tend to represent resistance and support, respectively, can be helpful in assessing the necessary follow-through any breakout requires in order to become a trend.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

Title: Technical Writer
Company: Technical Analysis, Inc.
Address: 4757 California Avenue SW
Seattle, WA 98116
Phone # for sales: 206 938 0570
Fax: 206 938 1307
Website: www.Traders.com
E-mail address: DPenn@traders.com

Traders' Resource Links
Charting the Stock Market: The Wyckoff Method -- Books
Working-Money.com -- Online Trading Services
Traders.com Advantage -- Online Trading Services
Technical Analysis of Stocks & Commodities -- Publications and Newsletters
Working Money, at Working-Money.com -- Publications and Newsletters
Traders.com Advantage -- Publications and Newsletters
Professional Traders Starter Kit -- Software

Click here for more information about our publications!


Comments or Questions? Article Usefulness
5 (most useful)
4
3
2
1 (least useful)

Comments

Date: 10/08/02Rank: 5Comment: 
PRINT THIS ARTICLE





S&C Subscription/Renewal




Request Information From Our Sponsors 

DEPARTMENTS: Advertising | Editorial | Circulation | Contact Us | BY PHONE: (206) 938-0570

PTSK — The Professional Traders' Starter Kit
Home — S&C Magazine | Working Money Magazine | Traders.com Advantage | Online Store | Traders’ Resource
Add a Product to Traders’ Resource | Message Boards | Subscribe/Renew | Free Trial Issue | Article Code | Search

Copyright © 1982–2019 Technical Analysis, Inc. All rights reserved. Read our disclaimer & privacy statement.