Sunday, February 04, 2007

Chart Study: QQQQ

Here is a daily bar chart of the QQQQ covering the period from mid-August 2006 through last Friday.

In my view the most important principle for identifying support or resistance levels is this one. Highs form very near the levels of preceeding low points, and lows form very near the levels of preceeding high points.

On the chart above I have illustrated this principle by drawing horizontal lines through successive highs of the uptrend. Note how subsequent reactions within the trend stop at levels of preceeding high points. Since the trend has been upward, the reactions lows gradually move up and stop at successive temporary highs which preceeded them.

If one combines this observation with the fact that successive reactions against the trend direction typically match the length of some preceeding reaction, one has a handy method for identifying buy spots within an uptrend or sell spots within a downtrend.

For example, in an uptrend, look for a previous high which is just the length of a previous reaction below the current high. This would be a logical buy spot. In a downtrend, look for a previous low which is just the length of a previous rally above the current low. This would be a logical sell spot.

This idea can be carried further. If in an uptrend a reaction shows a daily close past any reasonable support level calculated in this way then the trend has probably turned downward. Reverse this idea in a downtrend.

I find this method superior to any other for identifying the direction of a market's current trend.

In the QQQQ's I think the important support level now is 42.62. A daily close below that level would probably mean that the intermediate term trend in the Q's has turned downward.

Do I think such a close is imminent? No. My policy is to trade with the direction of an ongoing trend unless there is unusually strong evidence that the trend is about to reverse. I see no such evidence in the Q's.


Anonymous said...

¡¡CRASH IMMINENT¡¡To buy over 12.600 dow jones a financial suicide for decades.

cbaer said...


could you give numeric examples related to the chart for the various computations you
refered to, especially indetifying buy points and trend changes.
My problem is that the latest reactions seem to be much larger than the ones we had while in the steep uptrend. So I am wondering if the current trend at the moment in not sideways.

Thanks in advance