S&P500 May trend line break

by Malcolm Pryor on 28/05/2013
Assessment of the overall market should take priority when deciding which trading strategies to employ. Some bulls who had been enjoying the consistent up move which had been in force from mid April to mid May received a shock at the end of last week: bad economic data from China coupled with a hint that QE might be reduced in USA produced a downward move, although not nearly as violent as in Japan and also many European indices including FTSE 100. So what has happened from a technical point of view? You can see from the attached chart of the S&P 500 index that the mid April to mid May trend line drawn beneath the lows of the move was broken at the end of last week. A trend line break doesn't of itself turn an up move into a down move: if this was the beginning of a significant change then typically after the trend line break price will come back up again to test the most recent high. This test can be a higher high, and equal high or a lower high. The key is what happens at that test: if price continues on up, then last week was just a pullback in a continuing up trend, and analysts would simply draw another trend line to incorporate the new data. If on the other hand the test fails, price can make no further head way beyond the recent high, and starts to fall, then that could be the start of a more significant pullback. The test of the most recent high, around 1680, will be key for our analysis. Note that on the chart my favourite set of moving averages, the 13 26 and 52 day exponential moving averages are still very much in up trend mode, with the 13 above the 26 and the 26 above the 52. It would take a cross of the 13 down below the 26 to signal a change of trend using this technique, and the signal would be a change from up to sideways initially.


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