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September 10, 2012 / redman59

Looking Back, We’re at a Prior Significant Level

Over the weekend I was going through some charts and then decided to pull up a long-term chart of the $SPX.  The time frame is a monthly chart going back to our last signficant top in 2007.  What I like about these longer term charts is that they can be simple and reduce a lot of noise as far as looking at the candle body and buying/selling tails.  What I found interesting about where our price was on Friday’s close is the reference to where it is at to the prior price action.  I drew a line at the level of interest as I saw this as a good support and resistance line (currently showing 1437.92)

Some notes about support and resistance and why I chose this level:

  • this is an area and not to-the-penny
  • “If a support or resistance level is broken, it signals that the relationship between supply and demand has changed” -StockCharts
  • serves as an awareness and I use it as a risk allocation

Specific to chart:

  • SPX broke out in April 2007 and the highlighted level was tested multiple times in 2007 and held, closing above each time
  • Closed below the highlighted level January 2008
  • May 2008 high tested the highlighted area and failed, candle pattern was confirmed to down side the next month
  • Nearly 4 1/2 years later we are testing that highlighted area again

Looking at this chart we can see that some churning can be expected as we are at a past signficant area.  Stated in a bullet above, support/resistance can be used as an awareness.  I personally would look for lighter allocation here as I expect some volatility to pick up.  We are at an area of indecisiveness and I find it hard to have a major bias on direction here.  I am looking for around a 5% pull back (around 1370) before adding more exposure.  I am also watching to see how the market reacts on a volatility basis with a pull back.  Also keep in mind your time frame.  This would hold more weight to longer-term holdings and in deciding to take profits or allocate more on a portfolio basis.  This would not hold as much significance to day or swing traders looking for those quick-hit trades.  This mostly serves as an awareness to expect some indecision.

If you are interested in easy to follow longer term timing methods, I have written two previous articles that show two methods that have beaten the SPX.  This was at the time of their writing and have not been updated since (both written 5/21/2012).

Timing using Monthly Time Period

Timing using Quarterly Time Period

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