The S&P 500 Index began trading in a Rising Range pattern as we turned the corner into December and so far has continued bouncing between the trendline boundaries of the pattern.
Let's take a moment to learn a key trading lesson from recognizing and trading this popular price pattern – the tip is to drop to the intraday frame and look for confirming signals that align with the bigger picture trendlines.
Here's the pure price pattern from late November to present:
[Related -Level 3 Communications, Inc. (LVLT): A Good Time To Buy Says Macquarie]
The Rising Range pattern above may also be described as a "Rising Parallel Trendline Channel."
The main idea is to identify an upper resistance line, a lower support trendline, and the "Midpoint" or middle line between the two parallel trendlines.
The Midpoint Line is the "Value" area which reflects the rising "value" (equilibrium) between buyers and sellers.
In hindsight, the pattern is crystal clear but the goal for successfully trading within these patterns involves early recognition and real-time monitoring.
That's what I wanted to discuss in this post – a big tip for setting up successful, low-risk trades as long as price continues to trade within the pattern.
Trendline patterns like these need three and preferably four points (price highs and lows) from which you can draw parallel trendlines.
[Related -Abercrombie & Fitch Co. (ANF) Q2 Earnings Preview: The Unkind Quarter]
In this example, the four points developed into early December as highlighted.
From there, the parallel trendlines could be projected into the future (you may have to extend your chart area).
These extended trendlines serve both as targets (taking profits) and potential opportunities (to initiate new trades).
While it's possible for short-term traders to use this simple pattern, the key to successful trading – with confidence – involves dropping to the lower timeframe to assess real-time conditions.
We're looking for visual divergences that occur as price in real time interacts with the higher timeframe trendline.
Here's what the real-time 5-min chart revealed during the last four "touches" or tests of these trendlines:
As December began, price was into an upper trendline and resistance area into the 1,420 level.
The 5-min intraday chart showed a visual negative divergence in Breadth as highlighted above – the November 29th peak in Breadth showed a reading of 1,717 while the index traded into 1,418; the December 1st Breadth peak (high of the day) was 1,117 (600 issues lower) as the SP500 made a new high above 1,422.
From there, price reversed toward the lower trendline and confluence support area of 1,400.
On December 5th, price did interact with the rising trendline and 1,400 area though Breadth was up almost 100 issues from the -890 reading from December 1st (when the index was trading at 1,409).
Those the early December intraday divergences and reversals were early in the broader Parallel Trendline Channel, the mid-December similar reversals had the benefit of being within clear and visual trendline boundaries:
On December 12th, price again interacted with the upper parallel trendline channel at 1,435 with a clear visual negative divergence in Breadth (1,452 on December 11th and 600 during the Fed-Day euphoria on December 12th).
Price subsequently traded toward the lower trendline boundary near 1,415 and reached this level on December 14th.
We see another clear visual positive divergence in Breadth relative to the December 13th lows (-1,570 with the SP500 at 1,418 versus -394 with the S&P 500 into 1,412).
From here, as seen in the 30-min chart above, price successfully rallied to the upper trendline above 1,445 and reversed again (with more divergences) from these levels.
The example here simply enhances the higher timeframe pattern by using lower timeframe Market Internals. The logic would be the same by showing divergences in momentum oscillators, NYSE TICK, or related indicators.
I hinted at it earlier when referencing the 1,400 support level, but it's also helpful to view other levels of potential support and resistance when assessing the potential trading tactics at trendline boundaries (as I highlighted in the "SP500 EMA Support Check to Start the Week" post).
The main lesson is to incorporate lower frame charts (which reveal more information) when you're assessing a higher timeframe pattern, especially a test of a key support or resistance level. This is the kind of logic we apply in the "game-planning" section of each night's Idealized Trades daily reports for members.