Saturday, April 3, 2010

Resistance Coridor?

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Two weeks of side-way trading are behind (for some indexes it was a third week). As I mentioned last week in my "Nasdaq Health Care" post (March 28, 2010) "The longer we stay at top (possible resistance level) the more shares (bigger volume) are traded at high price and the more overbought market is."

I think, there is no question that we are at some resistance corridor. There should not be discussion that positive money flow since February 2010 has pushed stock market into overbought condition. The only question that could be placed now is where the market will go from this side-way trading. Will it go into a correction (which I consider would be healthy)? or will it continue to go up on ... positive unemployment report (nothing more positive comes to mind)???

One of the simplest strategies (that could be used in the current situation) is waiting for indexes (S&P 500, DJI andNasdaq 100) to break their resistance corridor lines. Over the last two weeks, the upper line of the resistance corridor could be drawn through March 25 and April 1, 2010 highs. If the indexes break this line on their up-move then we may start to think about resumption of up-trend. The lower resistance corridor line could be drawn through March 26, 20010 low. If the indexes drop below this line we may start to think about a correction down.

On my opinion, this is very simple (no complicated technical analysis has to be performed) and very conservative approach. The gap between upper and lower lines of the resistance corridor is only about 2%. Yes, the market has been in up-move for two months. Yes, the indexes are overbought. Yes, many mid-term indicators suggest good odds of correction down. However, I am not a follower of guessing the highest points to sell and lowest points to buy, especially in case of mid- and long-term trends where 1-2 percents are not as important.

There could be other strategies used to confirm the exit from the current sideway trading. Personally, in addition to the resistance lines, I would watch volatility (increase in volatility would indicate increase in bearish mood among investors) and money flow (in the current moment money flow is on the way to become negative).

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