My Rule Of Thumb On Trendlines

June 2, 2004
Chris Curran

Stock index futures opened the holiday-shortened week
with small downside gaps on the heels of heightened terrorism fears and record
oil prices.Â The first 30 minutes were dominated by locals grinding higher to
fill the gap until higher-than-expected ISM and Construction Spending numbers at
10:00 gave an initial pop on the news, only to see pressure on the assertion
that any positive data will encourage a rate hike sooner.Â Overall, the session
was pretty much a seesaw with little conviction to either side, despite the
strong economic readings and high oil prices.

The June SP
500 futures closed Tuesdayâ€™s session with a gain of +1.00 point, and settled in
the upper 1/2 of the range.Â Volume in the ES was estimated at 621,000 contracts,
higher than Friday’s anemic pace, but still below the daily average.Â Looking at
the daily chart, the ES posted a hanging man just below the intersection of
broken uptrend line and downtrend line resistance, but was still able to settle
above its 50-day MA.Â On an intraday basis, both the 60-min and 30-min charts
broke their triangle patterns early but were able to settle back above MA
resistance (now support).

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June
bonds (ZB) closed lower on profit-taking triggered by the stronger manufacturing
survey and drew the line in the sand at the 20-day MA at 105.10.Â The U.S.
Dollar posted an inside market structure low off of its 10-day and 20-day MA
support. The Semiconductor Index (SOX) posted a doji just under its daily
downtrend line, but was still able to hold its 200-day MA.Â

^next^

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In addition
to the SP 500 and SOX indexes running into their trend lines, many other indices
and sectors are showing similar patterns. Most rallied above key moving average
resistance last week, but are now approaching resistance of their primary
downtrend lines that began sometime earlier in the year. The break above moving
average resistance, but rally into downtrend line resistance, is now generating
mixed signals to many traders, which is likely to cause erratic and volatile
action the rest of the week. My rule of thumb is that whenever an index
approaches trend line support or resistance that has been intact for several
months, it is always wise to assume the trend line will continue to act as
support or resistance until the market proves otherwise.Â If the broad market
begins to head back down this week, we can declare a resumption of the overall
downtrend that has been in place for several months. However, a confirmed break
above the daily downtrend lines would force the shorts to cover their positions.
As always, we will continue to trade what we see, not what we think!