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CHART ANALYSIS


A Trader Catches A Bottom Reversal On The S&P 500

02/18/03 12:37:14 PM
by Gary Grosschadl

Catching tops and bottoms is difficult but can be rewarding/punishing depending on the outcome.

Security:   $SPX
Position:   Buy

I believe last Thursday (February 13) began a bullish turn in the markets. How long this lasts remains to be seen and bear rally thoughts prevail until the market proves itself further by rising above the 200-day moving average with sustainability.

Using the S&P 500 ($SPX) as a proxy for all the main indices, I anticipated a bounce here by virtue of the SPX's head and shoulders pattern being fulfilled. In a recent article I outlined the SPX failing at its third fanline which led to a head and shoulders test. The pattern by measurement fulfilled around the 810 mark and the intraday chart on Thursday certainly gave hints that this might be the case. The daily chart for February 13 and the following day added credence to this reversal possibility.

Live trading notes (with permission) from www.chartlook.com
Graphic provided by: Canada Stockwatch.
 
The charts above captured my thoughts on Thursday when this reversal attempt actually started. The markets were off slightly but you had to be watching the action to see that there was a reversal on the Dow (for example) from a triple digit deficit to near flat on the day. The top chart is a daily chart going back six months and it clearly shows the head and shoulders pattern. The chart was actually one day behind because it reflects the closing day pattern, not the intraday snapshot. This is why I indicated that it had gone down to the 810 zone at 11:50 EST (not shown on chart).

I then switched to an intraday chart to see if indeed there was to be a bounce up from this head and shoulder fulfillment level. Shortly after 2:30 the signal came on this 5-minute intraday chart. The lower indicator was the MACD (moving average convergence/divergence). A positive divergence to index action developed and this led to a successful bullish attack above the 20-period EMA resistance line (in blue). As the chart shows, a rapid move up pushed past the 200-period EMA.

A brief retracement ensued and I waited to see if that important line would now hold as support. That "snapshot" view was taken 32 minutes before the close. Yes that support level did hold and the market closed at a higher level.

The daily closing candlesticks on Thursday for the main indices were all encouraging. The SPX and the DOW had doji candlesticks and the Nasdaq had a hammer. On Friday I was looking for some follow through confimations and they came. On the daily charts, all three main indices suggest the chance of bottom reversals occuring. The Nasdaq's potential bottom hammer was confirmed to the upside while the Dow and SPX both had their doji candlesticks confirmed to the upside.

After an extended move down, hammers and dojis often mark a turning point or bottom reversal. The action in the coming week should be very interesting for the bulls bearing any wildcard developments-- stay tuned for a busy week.



Gary Grosschadl

Independent Canadian equities trader and technical analyst based in Peterborough
Ontario, Canada.

Website: www.whatsonsale.ca/financial.html
E-mail address: gwg7@sympatico.ca

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